Question

An income statement for the first year of operations for Patti Company appears below:

Sales	$	390,000
Dividend revenue		39,000
Interest revenue		24,050
Cost of goods sold		(208,000	)
Salary expense		(26,000	)
Depreciation expense		(70,200	)
Income tax expense		(109,200	)
Net income	$	39,650

Additional information:

1. Accounts payable, end of year, $13,000.

2. Salaries payable, end of year, $8,450.

3. Inventories, end of year, $26,000.

4. Accounts receivable, end of year, $32,500.

Required:

Use the direct approach to calculate the cash provided (used) by operating activities for Patti Company. (Net cash outflows and amounts to be deducted should be indicated by a minus sign.)

Answer 1

Under direct approach cash actually paid or received is calculated.

note (1) Cash received from sales will be = Sales - Balance of accounts receivable

390000-32500 = 357500

(2) Dividend and interest revenue are Investment income to be considered in investing activities. For cash flow from operating activities, it will not be considered.

(3) Salary paid will be = Salary expense - salary payable

26000-8450= 17550

(4) purchases = COGS + inventory at end

208000+26000= 234000

Cash paid to suppliers = purchases - Accounts payable balance

234000-13000= 221000

(5) Depreciation are non-cash expenses. So it will not generate cash outflow

Calculation of Cash flow from operating activities

Cash received from sales 357500

less: Cash paid to suppliers. -221000

less: salaries paid. -17550

less: income tax expenses. -109200

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Cash flow from operating activities $9750

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So, Cash flow from operating activities is $ 9750