Question

Presented below are two independent situations.

Situation A:
Annie Lennox Co. reports revenues of $200,000 and operating expenses of $110,000 in its first year of operations, 2017. Accounts receivable and accounts payable at year-end were $71,000 and $29,000, respectively. Assume that the accounts payable related to operating expenses. (Ignore income taxes.)

Using the direct method, compute net cash provided (used) by operating activities. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)

Net cash (used/provided) by operating activities _____________

Situation B:
The income statement for Blues Traveler Company shows cost of goods sold $310,000 and operating expenses (exclusive of depreciation) $230,000. The comparative balance sheet for the year shows that inventory increased $26,000, prepaid expenses decreased $8,000, accounts payable (related to merchandise) decreased $17,000, and accrued expenses payable increased $11,000.

Compute (a) cash payments to suppliers and (b) cash payments for operating expenses.

a. Cash payments to suppliers ____________

b. Cash payments for operating expenses _____________

Answer 1

Situation A

Net cash provided (used) by operating activities. =$48,000

Working

Cash flows from operating activities:
Cash received from customers		$ 129,000
Cash payments for merchandise	-$ 81,000
		-$ 81,000
Net cash flow from operating activities		$ 48,000

Cash received from customers
Service revenue	$ 200,000
Less; Increase in accounts receivable	-$ 71,000
Cash received from customers	$ 129,000

Cash payments for operating expenses
Operating expenses	$ 110,000
Less: Increase in accounts payable	-$ 29,000
Cash payments for operating expenses	$ 81,000

Situation B

a. Cash payments to suppliers = $353,000

b. Cash payments for operating expenses=$211,000

Working

Cash payments for merchandise
Cost of goods sold	$ 310,000
Add: Increase in Inventory	$ 26,000
Net purchases	$ 336,000
Add: Increase in Accounts payable	$ 17,000
Cash payments for merchandise	$ 353,000

.

Cash payments for Operating expenses
Operating expenses excluding depreciation	$ 230,000
Less: Increase in accrued expenses	-$ 11,000
Cash payments for merchandise	$ 219,000
Less: Decrease in prepaid expense	-$ 8,000
Cash payments for Operating expenses	$ 211,000