Statement of Cash Flows�Direct Method

Statement of Cash Flows�Direct Method - APPENDIX 138...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: APPENDIX 138 Statement of Cash Flows—Direct Method Prepare a statement of cash flows using the direct method. To explain and illustrate the direct method, we will use the transactions of Juarez Comp any for 2011, to prep are a statement of cash flows. Illustration 13B-1 presents information related to 2011 for Juarez Comp any. JUAREZ COMPANY Comparative Balance Sheets December 31 Change Assets Elli} 2010 InLTcnsefllc-crense Cash $101.00] $159,000 5 32.0001nc1'ease Accounts receivable 12.003 15.000 3.000 Decrease Inventory 170.003 160.000 10.000 Increase Prepaid expenses 6,007 8.000 2.000 Decrease Land 140,000 80.000 60.000 Increase Equipment 160.00] —0— I60.000 Increase Accumulated depreciation—equipment [16.003] —0— 16.000 Increase Total $663.00] $422 .000 Liabilities and Stockholders' Equity Accounts payable ‘5 52,003 $ 60,000 $ 8.000 Decrease Accrued expenses payable 15.000 20.000 5,000 Decrease Income tax payable 12.000 —0— 12.000 Increase Bends payahie 130.0021 —0— 130.000 Increase Common stock 360.0021 300.000 60.000 Increase Retained earnings 94.003 42 .000 52.000 Increase Total $663,003 $422,000 JUAREZ COMPANY Income Statement For the Year Ended December 31, 2011 Revenues $915,000 Cost of goods sold $660,000 Operating expenses {excluding depreciation] 1116.000 Depreciation expense 18,000 Loss on sale of store equipment 1.000 855.000 Income before income taxes 120.000 Income tax expense 36.000 Net income $ 84.000 Additional infermatien: 1. [n 2011. the company declared and paid a $32000 cash dividend. 2. Bonds were issued at face value for $130,000 in cash. 3. Equipment costing $180000 was purchased for cash. 4. Equipment costing $20,010 was sold for $11.00] cash when the hook value of the equipment was $18.03]. 5. Common stock 011560.000 was issued to acquire land. Illustration 13B-1 Comparative balance sheets, income statement, and additional information for Juarez Company To prep are a statement of cash flows under the direct approach, we will apply the three steps outlined in Illustration 13-3. Step 1: Operating Activities DETERMINE NET CASH PROVIDED/USED BY OPERATING ACTIVITIES BY CONVERTING NET INCOME FROM AN ACCRUAL BASIS TO A CASH BASIS Under the direct method, companies compute net cash provided by operating activities by adjusting each item in the income statement from the accrual basis to the cash basis. To simplify and condense the op crating activities section, companies report only major classes of ope rating cash receipts and cash payments. For these major classes, the difference between cash receipts and cash payments is the net cash provided by operating activities. These relationships are as shown in Illustration l3B-2. Net Cash Provided by Operating Activitifis Cash Receipts — Cash Payments To suppliers From sales of goods and semces To employees L0 customers For cpemting NEI (Eh expenses proud by Operating activities Fer interest From receipts oi interest and divide-ids on loans and invesunems Fer taxes Illustration 133-2 Major classesof cash receiptsand payments An efficient way to apply the direct method is to analyze the items reported in the income statement in the order in which they are listed. We then determine cash receipts and cash payments related to these revenues and expenses. The following pages present the adjustments required to prepare a statement of cash flows for Juarez Comp any using the direct approach. Cash Receipts from Customers. The income statement for Juarez Comp any reported revenues from customers of $975,000. How much of that was cash receipts? To answer that, comp anies need to consider the change in accounts receivable during the year. When accounts receivable increase during the year, revenues on an accrual basis are higier than cash receipts from customers. Operations led to revenues, but not all of these revenues resulted in cash receipts. To determine the amount of cash receipts, the comp any deducts from sales revenues the increase in accounts receivable. On the other hand, there may be a decrease in accounts receivable. That would occur if cash receipts from customers exceeded sales revenues. In that case, the comp any adds to sales revenues the decrease in accounts receivable. For Juarez Comp any, accounts receivable decreased $3,000. Thus, cash receipts from customers were $978,000, comp utcd as shown in Illustration 13B-3. Revenues from sales WTSJIIEI Add: Decrease in accounts receivable 3J1]?! I';II.I| I'l-ug-iIII-u I'l'ilm l'IIkIHIIfl'I'fi .‘IIIITHJHIII Illustration 13B-3 Computation of cash receiptsfrom customers Juarez can also determine cash receipts from customers from an analysis of the Accounts Receivable account, as shown in Illustration 13B-4. film Illllhi Ruceim hlc 1.-'I-"]] Baltlncc lilill'llil Hut-inr- Irum I'l"-IHIII1.'I'~ IITSJIIIII Revenues from sales HIT-“5.0011 [3'31 -"1J Balance Jj _l.'l[)l'.l Illustration 133-4 Analysis of accounts receivable The T account shows that revenue plus decrease in receivables equals cash receipts. Illustration 13B-5 shows the relationships among cash receipts from customers, revenues from sales, and changes in accounts receivable. Cash Reseipts Revenues I + Decrease in Accounts Receivable from : from -- or Customers Sales I — Increase in Accounts Receivable Illustration 133-5 Formula to compute cash receipts from customers—direct method Cash Payments to Suppliers. Juarez Comp any reported cost of goods sold of $660,000 on its income statement. How much of that was cash payments to suppliers? To answer that, it is first necessary to find purchases for the year. To find purchases, companies adjust cost of goods sold for the change in inventory. When inventory increases during the year, purchases for the year have exceeded cost of goods sold. As a result, to determine the amount of purchases, the comp any adds to cost of goods sold the increase in inventory. In 2011, Juarez Company's inventory increased $10,000. It computes purchases as follows. (Test of goods sold filfitilll'lll’l Add: Increase in jnvcntuly llll'lll’l I’lllt'lltlkL-x ~hrJ‘lLlIll'lI Illustration 133-6 Computation of purchases After computing purchases, a comp any can determine cash payments to suppliers. This is done by adjusting purchases for the change in accounts payable. When accounts payable increase during the year, purchases on an accrual basis are higher than they are on a cash basis. As a result, to determine cash payments to suppliers, a comp any deducts from purchases the increase in accounts payable. On the other hand, if cash payments to suppliers exceed purchases, there will be a decrease in accounts payable. In that case, a comp any adds to purchases the decrease in accounts pay able. For Juarez Company, cash payments to suppliers were $678,000, computed as follows. Pu rc ha 5c 5 $6M _I_‘ II'JD A dd; Dc crease in ncccnl nls payable HEIDI] I 'mll litl}|||\'||lx In ~II|'II‘I|i1_'|'-u 'E-h'l'fijlllll Illustration 133-7 Computation of cash paymentsto suppliers Juarez also can determine cash payments to suppliers from an analysis of the Accounts Payable account, as shown in Illustration 13B-8. Accullntu i‘aynbli: l'alnm-nla In Hlll}|llii.'l'.~ r-TSJIIHI ].-"I.-'II Balance tatJJllDU Purchases nTILUDU I 3.53 I.-' 1 I Balance 52 .000 Illustration 13B-8 Analysis of accounts payable The T account shows that purchases plus decrease in accounts payable equals payments to suppliers. Illustration 13B-9 shows the relationships among cash payments to suppliers, cost of goods sold, changes in inventory, and changes in accounts payable. Cash Cost + Decrease in payments, of + Increase in Inventory Accounts Payable to = Goods fill‘ or SuPPIiel-g 50M — Decrease In Inventory — Increase In Accounts Payable Illustration 13B-9 Formula to compute cash payments to suppliers—direct method Cash Payments for Operating Expenses. Juarez reported on its income statement operating expenses of $176,000. How much of that amount was cash paid for operating expenses? To answer that, we need to adjust this amount for any changes in prep aid exp enscs and accrued expenses payable. For example, if prep aid expenses increased during the year, cash paid for operating expenses is higler than op crating exp enses rep orted on the income statement. To convert operating expenses to cash payments for operating expenses, a comp any adds the increase to op crating expenses. On the other hand, if prep aid exp enses decrease during the year, it deducts the decrease from op crating expenses. Companies must also adjust operating expenses for changes in accrued expenses payable. When accrued expenses payable increase during the year, operating expenses on an accrual basis are higher than they are in a cash basis. As a result, to determine cash payments for operating expenses, a comp any deducts from operating expenses an increase in accrued expenses payable. On the other hand, a comp any adds to op crating expenses a decrease in accrued expenses payable because cash payments exceed operating expenses. Juarez Company's cash payments for operating expenses were $179,000, computed as follows. Operating expenses $ITb.t.IiJ|_'i Deduct. Decrease in prepaid expenses _"_I.'.IiJ|_'i Add: Decrease in :lCCI'LleL'l expenses payable 5.000 l.'.|~.|| pnpnenh I'nr nlrernllllu expense-u H'J‘lldlllll Illustration 13B-10 Computation of cash payments for operating expenses Illustration 13B-11 shows the relationships among cash payments for operating expenses, changes in prep aid expenses, and changes in accrued expenses payable. 535" + Increase in + Decrease in Accrued Pal-“"19"” operating Prepaid Expense Expenses Payable f°"_ = Expenses 0r 0" OPGI'HUHQ — Decrease in — Increase in Accrued Expense-'9 Prepaid Ex pense Expenses Payable Illustration 13B-11 Formula to compute cash payments for operatingexpenses—direct method Depreciation Expense and Loss on Sale of Equipment. Companies show op crating exp enscs exclusive of depreciation. J uarcz's depreciation expense in 2011 was $18,000. Depreciation expense is not shown on a statement of cash flows because it is a noncash charge. If the amount for operating expenses includes depreciation expense, the comp any must reduce operating expenses by the amount of depreciation to determine cash payments for operating expenses. The loss on sale of equipment of $1,000 is also a noncash charge. The loss on sale of equipment reduces net income, but it does not reduce cash. Thus, companies do not report on a statement of cash flows the loss on sale of equipment. Other charges to exp ense that do not require the use of cash, such as the amortization of intangible assets, depletion expense, and bad debt ...
View Full Document

This note was uploaded on 01/31/2012 for the course PROB 343 taught by Professor Hin during the Spring '11 term at Adrian College.

Page1 / 4

Statement of Cash Flows�Direct Method - APPENDIX 138...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online