Question

Analyzing Operating Cash Flows (Direct Method)
Lincoln Company owns no plant assets and reported the following income statement for the current year:

Sales		$600,000
Cost of goods sold	$376,000
Wages expense	88,000
Rent expense	33,600
Insurance expense	12,000	509,600
Net income		$90,400

	End of Year	Beg. of Year
Accounts receivable	$59,400	$53,900
Inventory	66,000	72,600
Prepaid insurance	8,800	7,700
Accounts payable	24,200	19,800
Wages payable	9,900	12,100

Calculate the net cash flow from operating activities using the direct method. Show a related cash flow for each revenue and expense.

Cash Flows from Operating Activities (Direct Method)
Cash Received from Customers		Answer Correct Mark 1.00 out of 1.00
Cash Paid for Merchandise Purchased	Answer Correct Mark 1.00 out of 1.00
Cash Paid to Employees	Answer Correct Mark 1.00 out of 1.00
Cash Paid for Rent	Answer Correct Mark 1.00 out of 1.00
Cash Paid for Insurance	Answer Correct Mark 1.00 out of 1.00	Answer Incorrect Mark 0.00 out of 1.00
Net Cash Provided by Operating Activities		Answer Correct Mark 1.00 out of 1.00

Compute its operating cash flow to current liabilities (OCFCL) ratio. (Assume current liabilities consist of accounts payable and wages payable.)

Round answer to two decimal places.
Answer

Answer 1

Cash Flows from Operating Activities (Direct Method)
Cash Received from Customers		$ 594,500
Cash Paid for Merchandise Purchased	$ 365,000
Cash Paid to Employees	$    90,200
Cash Paid for Rent	$    33,600
Cash Paid for Insurance	$    13,100	$ 501,900
Net Cash Provided by Operating Activities		$    92,600

Explanations :-

Cash Received from Customers
Sales	$ 600,000
Less: Increase Account Receivable	$      5,500
	$ 594,500
Cash Paid for Merchandise Purchased
Cost of goods sold	$ 376,000
Less: Decrease Inventory	$      6,600
Less: Increase Account Payable	$      4,400
	$ 365,000
Cash Paid to Employees
Wages Expense	$    88,000
Add: Decrease wages Payable	$      2,200
	$    90,200
Cash Paid for Insurance
Insurance Expense	$    12,000
Add: Increase Prepaid Insurance	$      1,100
	$    13,100

(2) Compute its operating cash flow to current liabilities (OCFCL) ratio

Operating cash flow = $92600

Current liabilities = Accounts payable + wages payable

= $24200 + $9900 = $34100

OCFCL ratio = Operating cash flow/Current liabilities

= $92600/$34100 = 2.72