Question

Cash flows from operating activities-direct method Instructions Amount Descriptions Statement of Cash Flows-Operating Activities Instructions Sales $445,100.00 2 Cost of merchandise sold 157,900.00 5 Gross profit $287,200.00 Operating expenses: Depreciation expense $38,300.00 116,190.00 Other operating expenses Total operating expenses 154,490.00 Income before income tax $132,710.00 Income tax expense 40,590.00 $92,120.00 10 Net income

Answer 1

Under the direct method, before calculating net cash flows from operating activities, we will first calculate the components of operating activities section. We will analyse the previous year and current year figures to find out the increase or decrease in activity / transaction as per below:

1. Cash received from customers:

Sales $445100

Less: Increase in accounts receivables - $5120

Cash received from customers $439980

2. Cash paid to suppliers:

Cost of the goods sold $157900

Add: Increase in inventory    $11790

Less: Increase in accounts payable - $4350

Cash paid to suppliers    $165340

3. Income taxes paid:

Beginning income tax payable $4260

Add: Income tax expense $40590

Less: Ending income tax payable - $4260

Income tax paid $40590

4. Operating cash payments:

Operating expenses $116190

Less: Decrease in prepaid expense - $1480

Add: Decrease in accrued expense payable $1410

Cash paid for operating expenses $116120

Now, we will prepare the cash flows from operating activities section of the statement of cash flows as per below:

Description	Amount
Operating activities:
Cash received from customers	$439980
Less: Cash paid to suppliers	- $165340
Less: Operating expenses paid	- $116120
Less: Income tax paid	- $40590
Net cash flows from operating activities	$117930