Q27E - Horngren'S Financial And Managerial Accounting

Question

Preparing operating activities cash flow—direct method 

The accounting records of Four Seasons Parts reveal the following: 

Payment of salaries and wages \( 34,000 

Net income \) 21,000 

Depreciation expense 10,000 

Payment of income tax 16,000 

Payment of interest 17,000 

Collection of dividend revenue 5,000 

Payment of dividends 5,000

Payment to suppliers 51,000 

Collections from customers 116,000 

Compute cash flows from operating activities using the direct method for the year ended December 31, 2018.

Step-by-Step Solution

Answer

Net cash provided by operating activities is $3,000.

Step-by-Step Solution Step 1: Cash flow from operating activities

Cash flows from operating activities
Receipts:
Collection from customers	$116,000
Collection of dividend revenue	$5,000
Payments:
To suppliers	($51,000)
To employees	($34,000)
For income tax	($16,000)
For Interest	($17,000)
Net cash provided by operating activities		$3,000

Step 2: Treatment of net income

Net income is used while preparing cash flow statement by indirect method.