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 \(\$ 450,000\) and accounts receivable decreased by \(\$ 21,000\) during the year, what was the amount of cash received from customers? b. If income tax expense for the current year was \(\$ 35,000\) and income tax payable decreased by \(\$ 3,100\) during the year, what was the amount of cash payments for income tax?

Step-by-Step Solution

Answer

Cash received from customers: $471,000; Cash payments for income tax: $31,900.

Step 1: Locate Sales Value and Accounts Receivable Change

We start with the given sales value for the year, which is \( \\(450,000 \). The decrease in accounts receivable is reported to be \( \\)21,000 \). These two values are essential for calculating the cash received from customers.

Step 2: Calculate Cash Received from Customers

To determine the cash received from customers, we use the formula: \( \text{Cash Received} = \text{Sales} + \text{Decrease in Accounts Receivable} \). Substituting the given values, we get: \( \text{Cash Received} = \\(450,000 + \\)21,000 = \$471,000 \).

Step 3: Locate Income Tax Expense and Payable Change

Next, identify the income tax expense, which is \( \\(35,000 \). The decrease in income tax payable is \( \\)3,100 \). This information will allow us to calculate the cash payments for income tax.

Step 4: Calculate Cash Payments for Income Tax

The cash paid for income tax can be calculated using the formula: \( \text{Cash Payments} = \text{Income Tax Expense} - \text{Decrease in Income Tax Payable} \). Substituting the provided values, we have: \( \text{Cash Payments} = \\(35,000 - \\)3,100 = \$31,900 \).

Key Concepts

Cash Received from Customers

Understanding the concept of cash received from customers is essential for interpreting a company's financial health. In our exercise, we determine this by examining sales and changes in accounts receivable over the period. To calculate cash received from customers, we consider:

• Total sales made within the year.
• Changes, particularly decreases, in accounts receivable.

A decrease in accounts receivable, as seen in this exercise, means that previous credit sales were collected as cash during the year. The formula to find the cash received is:\[ \text{Cash Received from Customers} = \text{Sales} + \text{Decrease in Accounts Receivable} \] In our scenario, with sales at \(450,000 and a \)21,000 decrease in accounts receivable, cash received totals $471,000. This figure highlights the cash inflow from customers over the year, a critical measure of liquidity.

Cash Payments for Income Tax

Cash payments for income tax are a crucial outflow to track as part of a company's operating activities. Here, we calculate this amount using the income tax expense alongside the change in the income tax payable.Here's what you need:

• Income Tax Expense for the year.
• Changes, particularly decreases, in Income Tax Payable.

When income tax payable decreases, it suggests that the company paid off some of its tax obligations using cash.To find the cash payments made, apply the formula:\[ \text{Cash Payments} = \text{Income Tax Expense} - \text{Decrease in Income Tax Payable} \] In our example, with a \(35,000 income tax expense and a \)3,100 decrease in income tax payable, the calculated cash payment is $31,900. This illustrates how much cash left the company to settle its tax dues, impacting net cash flow.

Statement of Cash Flows

The statement of cash flows is a financial report that provides a comprehensive overview of a company’s cash inflows and outflows over a specified period. It is divided into three primary sections: operating, investing, and financing activities. For our exercise, we focus on the operating section, which includes:

• Cash received from customers.
• Cash payments for expenses like income tax.

The direct method involves listing major classes of gross cash receipts and payments, leading to a clear picture of cash generated from operations. The goal of the statement of cash flows is to provide insights into how a company generates and uses cash. This can reveal a company's ability to maintain liquidity and support operations, which is key for stakeholders in decision-making. In our example, the exercise's calculations for cash received from customers and paid for taxes exemplify this section’s practical application.