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7Apx--1 College Accounting Heintz & Parry 20 th Edition.

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1 7Apx--1 College Accounting Heintz & Parry 20 th Edition

2 Chapter 23 Appendix: Statement Of Cash Flows: The Direct Method

3 1 Describe the direct method of reporting cash flows from operating activities.

4 THE DIRECT METHOD Under the direct method, revenues and expenses reported on the income statement are adjusted to reflect the cash received or paid for each item The investing and financing activities sections of the statement of cash flows are the same under both the direct and the indirect methods

5 2 Prepare a schedule for the calculation of cash generated from operating activities under the direct method by adjusting revenues and expenses for changes in current assets and current liabilities associated with operations.

6 STATEMENT OF CASH FLOWS EXAMPLE: Simplex Company has prepared its income statement and statement of retained earnings for the year ended December 31, and the balance sheets for December 31, and Now it needs to prepare its statement of cash flows.

7 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 160,000 $ 90,000 Assets Increase (Decrease) Current assets: Cash Accounts receivable Merchandise inventory Total current assets Property, plant, and equipment: Land Building Equipment Total property, plant, and equip. Total assets $200,000 $(110,000) 190,000(30,000) 180,000200,000(20,000) $430,000$590,000 $(160,000) $ 40,000 $ 0 140, ,000 0 $280,000$ 40,000$ 240,000 $710,000$630,000$ 80,000 The statement of cash flows will explain how the cash account decreased by $110,000 in Simplex Company Comparative Balance Sheet December 31, 20-2 and 20-1

8 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 600,000 $900,000 Income StatementAdditionsDeductions Cash Flow Sales Cost of goods sold Gross profit Operating expenses Net income 177,000 $300,000 $ 80,000 The revenues and expenses from the income statement are used in computing the “cash flow generated from operating activities.” Income before taxes Income tax expense $123,000 43,000 Simplex Company Schedule for the Calculation of Cash Generated from Operating Activities For Year Ended December 31, 20-2

9 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 600,000 $900,000 Income StatementAdditionsDeductions Cash Flow Sales Cost of goods sold Gross profit Operating expenses Net income 177,000 $300,000 $ 80,000 Income before taxes Income tax expense $123,000 43,000 We’ll start with the sales. Sales (revenues) are recognized when earned, regardless of the amount of cash actually received. Sales must be converted to the amount of “cash received from customers.” Simplex Company Schedule for the Calculation of Cash Generated from Operating Activities For Year Ended December 31, 20-2

10 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASH RECEIVED FROM CUSTOMERS Accounts Receivable To convert sales into the “cash received from customers,” we need to examine the accounts receivable account. 190,000Beg. bal.

11 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASH RECEIVED FROM CUSTOMERS Sales ? Accounts Receivable 190,000Beg. bal. Sales increase the accounts receivable account.

12 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASH RECEIVED FROM CUSTOMERS ? Payments receivedSales ? Accounts Receivable 190,000Beg. bal. Accounts Receivable is decreased by customers making payments.

13 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASH RECEIVED FROM CUSTOMERS 160,000 End. bal. Sales ? Accounts Receivable 190,000Beg. bal. ? Payments received Accounts Receivable decreased by $30,000 during 20-2.

14 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASH RECEIVED FROM CUSTOMERS 160,000 End. bal. Sales ? Accounts Receivable 190,000Beg. bal. ? Payments received When Accounts Receivable decreases, Cash received from customers > Sales.

15 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASH RECEIVED FROM CUSTOMERS 160,000 End. bal. 900,000 Accounts Receivable 190,000Beg. bal. ? Payments received Sales for the year were $900,000. Sales

16 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASH RECEIVED FROM CUSTOMERS 930, ,000 End. bal. 900,000 Accounts Receivable 190,000Beg. bal. Payments rec’d. Sales Cash received from customers = Sales + Decrease in A/R = $900,000 + $30,000

17 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 600,000 $900,000 Income StatementAdditionsDeductions Cash Flow Sales Cost of goods sold Gross profit Operating expenses Net income 177,000 $300,000 $ 80,000 Income before taxes Income tax expense $123,000 43,000 Cash received from customers $30,000 $930,000 Simplex Company Schedule for the Calculation of Cash Generated from Operating Activities For Year Ended December 31, 20-2

18 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 600,000 $900,000 Income StatementAdditionsDeductions Cash Flow Sales Cost of goods sold Gross profit Operating expenses Net income 177,000 $300,000 $ 80,000 Income before taxes Income tax expense $123,000 43,000 $30,000 $930,000 Cost of goods sold is adjusted next. Simplex Company Schedule for the Calculation of Cash Generated from Operating Activities For Year Ended December 31, 20-2

19 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASH PAID FOR MERCHANDISE Merchandise Inventory 200,000Beg. bal. We need to determine the amount of merchandise purchased during the year.

20 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASH PAID FOR MERCHANDISE Purchases ? Merchandise Inventory 200,000Beg. bal. Purchases increase inventory.

21 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASH PAID FOR MERCHANDISE ? Cost of goods sold Purchases ? Merchandise Inventory 200,000Beg. bal. Selling goods (merchandise) reduces inventory.

22 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASH PAID FOR MERCHANDISE 180,000 End. bal. ? Cost of goods sold Purchases ? Merchandise Inventory 200,000Beg. bal. Inventory decreased by $20,000 during 20-2.

23 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASH PAID FOR MERCHANDISE 180,000 End. bal. ? Cost of goods sold Purchases ? Merchandise Inventory 200,000Beg. bal. When Merchandise Inventory decreases during the year, Cost of goods sold > Purchases.

24 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASH PAID FOR MERCHANDISE 600, ,000 End. bal. COGS Purchases ? Merchandise Inventory 200,000Beg. bal. Cost of goods sold for 20-2 is $600,000.

25 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASH PAID FOR MERCHANDISE 580, , ,000 End. bal. COGS Purchases Merchandise Inventory 200,000Beg. bal. Purchases for 20-2 = Cost of Goods Sold – Decrease in Merchandise Inventory = $600,000 – $20,000

26 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASH PAID FOR MERCHANDISE 580, , ,000 End. bal. COGS Purchases Merchandise Inventory 200,000Beg. bal. Cost of merchandise purchased = $580,000

27 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 600,000 $900,000 Income StatementAdditionsDeductions Cash Flow Sales Cost of goods sold Gross profit Operating expenses Net income 177,000 $300,000 $ 80,000 Income before taxes Income tax expense $123,000 43,000 $ 30,000 $930,000 Decrease in Merchandise Inventory $(20,000) Simplex Company Schedule for the Calculation of Cash Generated from Operating Activities For Year Ended December 31, 20-2

28 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASH PAID FOR MERCHANDISE Accounts Payable 180,000 Beg. bal. 120,000 End. bal. Now that we know Simplex’s purchases, we need to determine how much cash was paid for these goods.

29 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASH PAID FOR MERCHANDISE 580,000 Purchases Payments ? Accounts Payable 180,000 Beg. bal. 120,000 End. bal. Purchases increase Accounts Payable, and cash payments on these purchases decrease Accounts Payable.

30 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASH PAID FOR MERCHANDISE 580,000 Purchases Payments ? Accounts Payable 180,000Beg. bal. 120,000 Accounts Payable decreased by $60,000 during Purchases < Cash paid End. bal.

31 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASH PAID FOR MERCHANDISE 640, ,000 Purchases Payments Accounts Payable 180,000 Beg. bal. 120,000 End. bal. Cash paid for merchandise = Purchases + Decrease in Accounts Payable = $580,000 + $60,000

32 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 600,000 $900,000 Income StatementAdditionsDeductions Cash Flow Sales Cost of goods sold Gross profit Operating expenses Net income 177,000 $300,000 $ 80,000 Income before taxes Income tax expense $123,000 43,000 $30,000 $930,000 $(20,000) Decrease in Accounts Payable 60, ,000 Simplex Company Schedule for the Calculation of Cash Generated from Operating Activities For Year Ended December 31, 20-2

33 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 600,000 $900,000 Income StatementAdditionsDeductions Sales Cost of goods sold Gross profit Operating expenses Net income 177,000 $300,000 $ 80,000 Income before taxes Income tax expense $123,000 43,000 $30,000 $930,000 $(20,000) 60,000 Operating expenses are generally adjusted for prepaid expenses, accrued liabilities, and depreciation. 640,000 Cash Flow Simplex Company Schedule for the Calculation of Cash Generated from Operating Activities For Year Ended December 31, 20-2

34 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 600,000 $900,000 Income StatementAdditionsDeductions Sales Cost of goods sold Gross profit Operating expenses Net income 177,000 $300,000 $ 80,000 Income before taxes Income tax expense $123,000 43,000 $30,000 $930,000 $(20,000) 60, ,000 Simplex does not have any of these items, so there is no need to adjust operating expenses. 177,000 $290,000 Cash Flow Simplex Company Schedule for the Calculation of Cash Generated from Operating Activities For Year Ended December 31, 20-2

35 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 600,000 $900,000 Income StatementAdditionsDeductions Cash Flow Sales Cost of goods sold Gross profit Operating expenses Net income 177,000 $300,000 $ 80,000 Income before taxes Income tax expense $123,000 43,000 $30,000 $930,000 $(20,000) 60, ,000 The balance sheet reports no receivables, payables, or other items related to income taxes. Thus, reported tax expense represents the amount of cash paid. 177,000 $113,000 43,000 $290,000 $ 70,000 Simplex Company Schedule for the Calculation of Cash Generated from Operating Activities For Year Ended December 31, 20-2

36 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cash flows from operating activities: Cash received from customers $(640,000) $930,000 Cash paid for merchandise Cash paid for operating expenses (177,000) Total cash disbursed for operating activities (860,000) $ 70,000 Net cash provided by operating activities Now that the operating section is completed, we will add in the investing and financing sections. Cash paid for income taxes (43,000) Simplex Company Statement of Cash Flows For Year Ended December 31, 20-2

37 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cash flows from operating activities: Cash received from customers $(640,000) $ 930,000 Cash paid for merchandise Cash paid for operating expenses (177,000) Total cash disbursed for operating activities (860,000) $ 70,000 Net cash provided by operating activities Cash flows from investing activities: Purchased building$(140,000) Purchased equipment(100,000) (240,000) Net cash used by investing activities Cash flows from financing activities: Issued note payable $ 10,000 Issued common stock 70,000 Cash paid for income taxes (43,000) Paid cash dividends (20,000) (Continued…) Remember, the investing and financing sections are the same for both the direct and the indirect methods. Simplex Company Statement of Cash Flows For Year Ended December 31, 20-2

38 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cash flows from financing activities: Paid cash dividends 60,000 Net cash provided by financing activities Issued note payable $ 10,000 Issued common stock 70,000 (20,000) Net decrease in cash$(110,000) Operating Investing Financing $ 70,000 (240,000) 60,000 $(110,000)

39 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cash flows from financing activities: Paid cash dividends 60,000 Net cash provided by financing activities Issued note payable $ 10,000 Issued common stock 70,000 (20,000) Net decrease in cash Cash balance, January 1, ,000 Cash balance, December 31, 20-2 What about more complex companies? $(110,000) $ 90,000

40 3 Prepare a schedule for the calculation of cash generated from operating activities under the direct method, including necessary adjustments when the company reports the following: a.Changes in current assets and current liabilities associated with operations. b.Depreciation expense. c.Gains or losses on the sale of long-term assets. d.Receivables and payables associated with interest revenue, interest expense, and tax expense.

41 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1,800 $ 17,980 Assets Increase (Decrease) Current assets: Cash Government notes Accrued interest receivable Total current assets Supplies and prepayments Property, plant, and equipment Store equipment Less accumulated depreciation $ 20,000 $ (2,020) 3,200(1,400) (200) 4,000 2,750 (2,930) $148,665$145,260 9,200$ 48,000 (14,000)4,000 Accounts receivable (net)60,21551,510 8,705 Merchandise inventory64,57067,500 1,250 3,405 $ 38,800 (18,000) Delivery equipment$ 47,000$ 32,00015,000 Step #1: Compute the change in cash and cash equivalents. Multiplex Company Comparative Balance Sheet December 31, 20-2 and 20-1

42 CASH AND CASH EQUIVALENTS To qualify as a cash equivalent: –An investment must be readily convertible to a known amount of cash These are considered the same as cash when preparing the statement of cash flows 20-1 Cash Government Notes $20,000 3,200 $23, $17,980 1,800 $19,780 $3,420 decrease

43 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 270,100 $460,100 Income StatementAdditionsDeductions Cash Flow Net sales Cost of goods sold Gross profit Operating expenses Operating income 120,750 $190,000 $ 69,250 Step #2: Prepare a schedule to calculate cash from operating activities. Interest revenue155 Interest expense650 Net income $ 47,755 Income tax expense24,000 Gain on sale of equip.3,000 Multiplex Company Income Statement For Year Ended December 31, 20-2

44 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 270,100 $460,100 Income StatementAdditionsDeductions Cash Flow Net sales Cost of goods sold Gross profit Operating expenses Operating income 120,750 $190,000 $ 69,250 Interest revenue155 Interest expense650 Net income $ 47,755 Income tax expense 24,000 Gain on sale of equip.3,000 Increase in Accounts Receivable $(8,705)$451,395 Multiplex Company Income Statement For Year Ended December 31, 20-2

45 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 270,100 $460,100 Income StatementAdditionsDeductions Cash Flow Net sales Cost of goods sold Gross profit Operating expenses Operating income 120,750 $190,000 $ 69,250 Interest revenue155 Interest expense650 Net income $ 47,755 Income tax expense24,000 Gain on sale of equip.3,000 $(8,705)$451,395 Decrease in inventory indicates purchases were less than what was sold. (2,930) Multiplex Company Income Statement For Year Ended December 31, 20-2

46 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 270,100 $460,100 Income StatementAdditionsDeductions Cash Flow Net sales Cost of goods sold Gross profit Operating expenses Operating income 120,750 $190,000 $ 69,250 Interest revenue155 Interest expense650 Net income $ 47,755 Income tax expense 24,000 Gain on sale of equip.3,000 $(8,705) $451,395 (2,930) Decrease in Accounts Payable indicates payments were more than purchases. $12,400 Multiplex Company Income Statement For Year Ended December 31, 20-2

47 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 270,100 $460,100 Income StatementAdditionsDeductions Cash Flow Net sales Cost of goods sold Gross profit Operating expenses Operating income 120,750 $190,000 $ 69,250 Interest revenue155 Interest expense650 Net income $ 47,755 Income tax expense24,000 Gain on sale of equip.3,000 $(8,705)$451,395 (2,930) $12,400 Operating expenses involve many accounts. 279,570 $171,825 Multiplex Company Income Statement For Year Ended December 31, 20-2

48 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. OPERATING EXPENSES Supplies and Prepayments 2,750 4,000 End. bal. Beg. bal. Supplies purchased and prepayments made ?

49 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. OPERATING EXPENSES Supplies and Prepayments 2,750 4,000 End. bal. Beg. bal. ?? Supplies and prepayments consumed (operating expenses)

50 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. OPERATING EXPENSES Supplies and Prepayments 2,750 4,000 End. bal. Beg. bal. ?? A $1,250 increase indicates more were purchased (paid) than were consumed (expensed).

51 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 270,100 $460,100 Income StatementAdditionsDeductions Cash Flow Net sales Cost of goods sold Gross profit Operating expenses Operating income 120,750 $190,000 $ 69,250 Interest revenue155 Interest expense650 Net income $ 47,755 Income tax expense24,000 Gain on sale of equip.3,000 $ (8,705)$451,395 (2,930) $12, ,570 $171,825 1,250 Multiplex Company Income Statement For Year Ended December 31, 20-2

52 OPERATING EXPENSES Multiplex informs us that depreciation expense of $10,400 is included in the operating expenses reported on the income statement. Depreciation does not use or provide cash, therefore it should be subtracted from operating expenses on our schedule.

53 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 270,100 $460,100 Income StatementAdditionsDeductions Cash Flow Net sales Cost of goods sold Gross profit Operating expenses Operating income 120,750 $190,000 $ 69,250 Interest revenue155 Interest expense650 Net income$ 47,755 Income tax expense24,000 Gain on sale of equip.3,000 $ (8,705)$451,395 (2,930) $12, ,570 $171,825 1,250 (10,400) Multiplex Company Income Statement For Year Ended December 31, 20-2

54 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. OPERATING EXPENSES 1, Accrued and Withheld Payroll Taxes Beg. bal. End. bal. The $570 decrease indicates more was paid than expensed.

55 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 270,100 $460,100 Income StatementAdditionsDeductions Cash Flow Net sales Cost of goods sold Gross profit Operating expenses Operating income 120,750 $190,000 $ 69,250 Interest revenue155 Interest expense650 Net income $ 47,755 Income tax expense24,000 Gain on sale of equip.3,000 $ (8,705)$451,395 (2,930) $12, ,570 $171,825 1,250 (10,400) Let’s analyze the interest revenue account ,170 $ 59,655 Multiplex Company Income Statement For Year Ended December 31, 20-2

56 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. INTEREST REVENUE Interest Receivable End. bal. Beg. bal. The $200 decrease indicates more was received than earned this period.

57 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 270,100 $460,100 Income StatementAdditionsDeductions Cash Flow Net sales Cost of goods sold Gross profit Operating expenses Operating income 120,750 $190,000 $ 69,250 Interest revenue155 Interest expense650 Net income$ 47,755 Income tax expense24,000 Gain on sale of equip.3,000 $ (8,705)$451,395 (2,930) $12, ,570 $171,825 1,250 (10,400) ,170 $ 59, Multiplex Company Income Statement For Year Ended December 31, 20-2

58 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 270,100 $460,100 Income StatementAdditionsDeductions Cash Flow Net sales Cost of goods sold Gross profit Operating expenses Operating income 120,750 $190,000 $ 69,250 Interest revenue155 Interest expense650 Net income$ 47,755 Income tax expense24,000 Gain on sale of equip.3,000 $ (8,705)$451,395 (2,930) $12, ,570 $171,825 1,250 (10,400) The gain is eliminated since it is not related to operating activities ,170 $ 59, (3,000) 0 Multiplex Company Income Statement For Year Ended December 31, 20-2

59 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 270,100 $460,100 Income StatementAdditionsDeductions Cash Flow Net sales Cost of goods sold Gross profit Operating expenses Operating income 120,750 $190,000 $ 69,250 Interest revenue155 Interest expense650 Net income $ 47,755 Income tax expense24,000 Gain on sale of equip.3,000 $(8,705)$451,395 (2,930) $12, ,570 $171,825 1,250 (10,400) ,170 $ 59, (3,000) Now analyze the interest expense account. 0 Multiplex Company Income Statement For Year Ended December 31, 20-2

60 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. INTEREST EXPENSE Interest Payable Beg. bal. End. bal. The increase indicates all but $20 of this year’s interest expense was paid.

61 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 270,100 $460,100 Income StatementAdditionsDeductions Cash Flow Net sales Cost of goods sold Gross profit Operating expenses Operating income 120,750 $190,000 $ 69,250 Interest revenue155 Interest expense650 Net income$ 47,755 Income tax expense24,000 Gain on sale of equip.3,000 $ (8,705)$451,395 (2,930) $12, ,570 $171,825 1,250 (10,400) ,170 $ 59, (3,000) 0 Income Tax Expense is the final account to be analyzed. (20) 630 Multiplex Company Income Statement For Year Ended December 31, 20-2

62 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. INCOME TAX EXPENSE 2,000 3,000 Income Tax Payable Beg. bal. End. bal. The increase indicates all but $1,000 of this year’s income tax expense was paid.

63 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 270,100 $460,100 Income StatementAdditionsDeductions Cash Flow Net sales Cost of goods sold Gross profit Operating expenses Operating income 120,750 $190,000 $ 69,250 Interest revenue155 Interest expense650 Net income $ 47,755 Income tax expense24,000 Gain on sale of equip.3,000 $ (8,705)$451,395 (2,930) $12, ,570 $171,825 1,250 (10,400) ,170 $ 59, (3,000) 0 (20) 630 (1,000) 23,000 $ 36,380 Multiplex Company Income Statement For Year Ended December 31, 20-2

64 4 Prepare a statement of cash flows under the direct method.

65 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cash flows from operating activities: Cash received from customers 355 $451,395 Cash paid for merchandise Cash provided by operating activities Cash paid for merchandise$(279,570) $ 451,750 Cash paid for operating expenses Interest paid Total cash disbursed for operating activities (415,370) (112,170) (630) Net cash provided bv operating activities$ 36,380 Income taxes paid(23,000) The operating activities section under the direct method is complete. Now, the investing and the financing activities sections are added. Multiplex Company Statement of Cash Flows For Year Ended December 31, 20-2

66 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cash flows from operating activities: Cash received from customers 355 $451,395 Cash paid for merchandise Cash provided by operating activities Cash paid for merchandise $(279,570) $ 451,750 Cash paid for operating expenses Interest paid Total cash disbursed for operating activities(415,370) (112,170) (630) Net cash provided bv operating activities $ 36,380 Income taxes paid(23,000) Cash flows from investing activities: Purchased store equipment Purchased office equipment $ 7,000 (9,200) (4,000) (12,000) Purchased delivery equipment Sold delivery equipment Net cash used by investing activities(18,200) (Continued…) Multiplex Company Statement of Cash Flows For Year Ended December 31, 20-2

67 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cash flows from financing activities: Issued common stock $ 3,000 Paid cash dividends (22,800) Retired note payable Net cash used bv financing activities Net increase in cash and cash equivalents Cash and cash equivalents, Jan. 1, 20-2 Cash and cash equivalents, Dec. 31, 20-2 (1,800) (21,600) $ (3,420) 23,200 $ 19,780 Noncash investing and financing activities are activities that involve no cash flow, but represent a significant change in the company’s financial position.

68 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cash flows from financing activities: Issued common stock$ 3,000 Paid cash dividends (22,800) Retired note payable Net increase in cash and cash equivalents Cash and cash equivalents, Jan. 1, 20-2 Cash and cash equivalents, Dec. 31, 20-2 (1,800) (21,600) $ (3,420) 23,200 $ 19,780 Schedule of noncash investing and financing activities: Acquired delivery equip. by issuing a note $ 13,000 Multiplex had one such transaction— the issuance of a note payable to purchase new delivery equipment. Net cash used by financing activities


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