Question

The income statement and a schedule reconciling cash flows from operating activities to net income are provided below for Macrosoft Corporation. 

 

Required: 

Prepare the cash flows from operating activities section of the statement of cash flows (direct method).

Answer 1

Statement of cash flows – Direct method

 

Statement of cash flow: A statement that shows the inflows and outflows of cash or cash equivalents is known as a cash flow statement.

 

Cash flows from operating activities: In direct method, the cash flow from operating activities is calculated by computing the Cash payments and Cash receipts.

 

(b) Cash inflows: It includes the receipt of cash from sales and accounts receivable.

 

(a) Cash outflows: It includes the payment of cash to the supplies and the payment of expenses.

 

Direct method: The direct method uses the cash basis of accounting for the preparation of the statement of cash flows.

 

Prepare cash flow from operating activities (direct method):

M Corporation
Statement of Cash flows – Direct Method
Year Ended December 31, 2016
Details	Amount ($)	Amount ($)
Cash flows from operating activities:
Cash received from customers	316
Cash increased from sale of cash equivalents	2
Cash paid to suppliers	(114)
Cash paid to employees	(34)
Cash paid for interest	(11)
Cash paid for insurance	(16)
Cash paid for income taxes	(52)
Net cash flows from operating activities		$91

 

 

Hence, the cash flow from operating activities is $91.

 

Working notes:

Calculate the amount of cash received from customers:

Cash received from customers = Sales revenue + Accounts receivable

= $310 + $6

= $316

 

Calculate the amount of cash paid to suppliers:

Cash paid to suppliers = [(Cost of goods sold + Inventory) – Account payable]

= [($120 + $12) - $18]

= $132 - $18

= $114

 

 

 

Calculate the amount of cash paid to employee:

Employee expenses = Salaries expense – Salaries payable

= $40 - $6

= $34

 

Calculate the amount of cash paid for interest expense:

Interest = Interest expense – Bond payable

             = $12 - $1

             = $11

 

Calculate the amount of cash paid for insurance expense:

Insurance expense = Insurance – Prepaid insurance

                              = $20 - $4

                              = $16

 

Calculate the amount of cash paid for income taxes:

Income taxes = Income tax expense – Income tax payable

= $62 - $10

= $52

 

 

Note:

The depreciation expense, patent amortization expense, and gain on sale of investment and loss on sale of land are neither cash inflows nor outflows.

(b) Cash inflows: It includes the receipt of cash from sales and accounts receivable.

(a) Cash outflows: It includes the payment of cash to the supplies and the payment of expenses.