Question

Cullumber Company's income statement for the year ended December 31, 2020, contained the following condensed information. $848,000 Service revenue $628,000 Operating expenses (excluding depreciation) Depreciation expense 61,000 Loss on sale of equipment 715,000 26,000 Income before income taxes 133,000 Income tax expense 40,000 Net income $93,000 Cullumber's balance sheet contained the following comparative data at December 31. 2020 2019 Accounts receivable $37,000 $52000 Accounts payable 39,000 32,000 Income taxes payable 4,000 8,400 (Accounts payable pertains to operating expenses Prepare the operating activities section of the statement of cash flows using the direct method. CULLUMBER COMPANY Statement of Cash Flows (Partial) For the Year Ended December 31, 2020 Cash Flows from Operating Activities Decrease in Accounes Receivable $ Decrease in Accounts Receivable Increase in Accounts Payable

Answer 1

Direct method uses the actual cash inflows instead of modifying the accruals into cash basis in indirect method. The cash flows from operating activities deals with cash received from primary activity of buying and selling or performing the main activity of the company. The relevant notes for question are given below.

Cullumber Company

                                                                Statement of Cash Flows(Partial)

                                                                For the Year ended

Cash Flows from Operating activities	Amount ($)	Amount ($)
Cash receipts from customers		860,000
Cash Payments
For operating expenses	(621,000)
For income taxes	(44,400)	(665,400)
Net cash provided by operating activities		$ 194,600

Working notes:

Cash receipts from Customers

Service Revenue	848,000
Decrease in accounts receivable (52,000-37,000)	12,000
Cash receipts from customers	860,000

Cash Payments for operating expenses

Operating expenses as per income statement	628,000
Less: Increase in accounts payable (39,000-32,000)	7,000
Cash Payments for operating expenses	$ 621,000

Cash Payment for income taxes

Income tax expense as income statement	40,000
Decrease in income taxes payable (8400-4000)	4,400
Cash payments for income taxes	$ 44,400

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