Question

Portions of the financial statements for Myriad Products are provided below.

MYRIAD PRODUCTS COMPANY Income Statement For the Year Ended December 31, 2018 ($ in millions)
Sales					$	720
Cost of goods sold						252
Gross margin						468
Salaries expense	$	105
Depreciation expense		80
Patent amortization expense		5
Interest expense		20
Loss on sale of land		4				214
Income before taxes						254
Income tax expense						127
Net Income					$	127

MYRIAD PRODUCTS COMPANY Selected Accounts from Comparative Balance Sheets December 31, 2018 and 2017 ($ in millions)
	Year
	2018			2017			Change
Cash	$	120		$	112		$	8
Accounts receivable		232			250			(18	)
Inventory		446			462			(16	)
Accounts payable		170			158			12
Salaries payable		86			98			(12	)
Interest payable		43			32			11
Income taxes payable		33			22			11

Required:
Prepare the cash flows from operating activities section of the statement of cash flows for Myriad Products Company using the direct method. (Amounts to be deducted should be indicated with a minus sign. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Answer 1

Solution:

Cash Flow from Operating Activities (Direct Method)
Cash receipts from customers (Refer Note 1)	$738
(-) Cash payments to merchandise (Note 2)	-$224
(-) Cash payment for Salaries expense (refer note 4)	-$117
(-) Income Taxes paid (Refer note 6)	-$116
Net Cash Flow from Operating Activities		$281

Note --- It is assumed that Interest Expense is a financing activity hence not taken in Operating Activity.

Note 1 -- Cash receipts from Customers
Beginning Accounts Receivable	$250
Plus: Credit Sales made during the year	$720
Less: Ending Accounts Receivable	-$232
Cash Collected from Customers	$738
Note 2 -- Cash payment for merchandise
Beginning Accounts Payable	$158
Plus: Purchases made during the year (refer note 3)	$236
Less: Ending Accounts Payable	-$170
Cash Paid to Supplier during the year	$224
Note 3 -- Purchase made during the year
Cost of Goods Sold	$252
Plus: Ending Inventory	$446
Less: Beginning Inventory	-$462
Purchases made during the year	$236
Note 4 -- Cash paid for salaries expense
Salaries Expense incurred during the year	$105
Add: Beginning Balance	$98
Less: Ending balance	-$86
Cash paid for salaries expense	$117
Note 5 -- Cash paid for Interest
Interest Expense incurred during the year	$20
Add: Beginning Balance	$32
Less: Ending balance	-$43
Cash paid for interest	$9
Note 6 -- Cash paid for Income Taxes
Income tax expense incurred during the year	$127
Add: Beginning Balance	$22
Less: Ending balance	-$33
Cash paid for Income Taxes	$116

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