Problem 19 - Accounting

Question

The cash flows from operating activities are reported by the direct method on the statement of cash flows. Determine the following: a. If sales for the current year were \(\$ 685,000\) and accounts receivable decreased by \(\$ 43,500\) during the year, what was the amount of cash received from customers? b. If income tax expense for the current year was \(\$ 46,000\) and income tax payable decreased by \(\$ 5,200\) during the year, what was the amount of cash payments for income tax?

Step-by-Step Solution

Answer

Cash received from customers is \( \$728,500 \) and cash payments for income tax are \( \$51,200 \).

Step 1: Understanding Cash Received from Customers

To find the cash received from customers, we need to adjust the sales amount by the change in accounts receivable. When accounts receivable decrease, it indicates that more cash was collected from customers than the sales made on credit.

Step 2: Calculating Cash Received from Customers

Given: Sales = \( \\(685,000 \) and Decrease in Accounts Receivable = \( \\)43,500 \). The cash received from customers is calculated as follows: \[\text{Cash Received from Customers} = \text{Sales} + \text{Decrease in Accounts Receivable}\]Substitute the given values: \[\text{Cash Received from Customers} = 685,000 + 43,500 = \$728,500 \]

Step 3: Understanding Cash Paid for Income Tax

To determine cash payments for income tax, adjust the income tax expense by the change in income tax payable. A decrease in income tax payable indicates more cash was used to pay taxes than the expense incurred in the current year.

Step 4: Calculating Cash Paid for Income Tax

Given: Income Tax Expense = \( \\(46,000 \) and Decrease in Income Tax Payable = \( \\)5,200 \). The cash payments for income tax is calculated as follows: \[\text{Cash Payment for Income Tax} = \text{Income Tax Expense} + \text{Decrease in Income Tax Payable}\]Substitute the given values: \[\text{Cash Payment for Income Tax} = 46,000 + 5,200 = \$51,200 \]

Key Concepts

Cash Received from Customers

The concept of "cash received from customers" is crucial for understanding cash flow in any business. It reflects the actual money collected from customers over a certain period. This amount often differs from the total sales metrics shown in a company’s income statement due to credit sales.
To determine the cash received from customers when using the direct method for cash flow statements, we modify the total sales figure by the change in accounts receivable. If accounts receivable decrease over the year, it means more customers have paid what they owe, resulting in more cash inflow.

• Increased accounts receivable means that customers are delaying payments, which reduces the cash received.
• Conversely, decreased accounts receivable, as in this example, signifies earlier payments, increasing the cash.

As in the example provided, with sales amounting to \(685,000 and a decrease in accounts receivable by \)43,500, the cash received from customers is calculated as:
\[\text{Cash Received from Customers} = \text{Sales} + \text{Decrease in Accounts Receivable} = 685,000 + 43,500 = \$728,500\]This calculation highlights that a reduction in accounts receivable typically equates to a higher cash influx from customers for that period.

Cash Payments for Income Tax

Understanding the "cash payments for income tax" is vital for accurately presenting the financial health of a business. This metric reveals how much of the business's cash is spent on income taxes within the reporting period.
When adjusting the income tax expense on the income statement to calculate cash payments for taxes, consider the change in income tax payable. A decrease in the payable amount suggests that the actual cash payments were greater than the accrued tax expense.

• This decrease implies the outflow of cash to settle past obligations or due taxes that were accounted for earlier.
• An increase in income tax payable would suggest unpaid taxes, which might reflect cash conservation efforts.

In our scenario, with an income tax expense of \(46,000 and a decrease in income tax payable by \)5,200, the cash payment for income tax is computed as:
\[\text{Cash Payment for Income Tax} = \text{Income Tax Expense} + \text{Decrease in Income Tax Payable} = 46,000 + 5,200 = \$51,200\]This method ensures that the financial statements accurately reflect the business's cash outflows concerning tax liabilities.

Accounts Receivable Impact

The "accounts receivable impact" on a cash flow statement is essential for grasping how sales on credit affect the cash position of a company. Accounts receivable represent sales that have been billed but not yet collected in cash.
An increase in accounts receivable during a period indicates that more sales were made on credit than were collected, reducing cash inflow. Conversely, a decline in accounts receivable suggests that the company was more successful in collecting owed amounts from their customers, thus boosting cash inflow.

• This directly affects the cash flow from operating activities on cash flow statements when using the direct method, as adjustments are made to reflect the real cash transactions.
• For example, if accounts receivable decrease by $43,500, it adds to the cash received because the company collected this amount from customers over and above the new sales.

In essence, monitoring the movement in accounts receivable gives insights into the efficiency of a company’s credit policies and collection processes, which in turn influences the liquidity as visible in cash flow statements.