Question

The income statement of Booker T Industries Inc. for the current year ended June 30 is as follows: Sales $511,000 Cost of merchandise sold 290,500 Gross profit $220,500 Operating expenses: Depreciation expense $39,200 Other operating expenses 105,000 Total operating expenses 144,200 Income before income tax $76,300 Income tax expense 21,700 Net income $54,600 Changes in the balances of selected accounts from the beginning to the end of the current year are as follows: Increase/ Decrease Accounts receivable (net) $(11,760) Inventories 3,920 Prepaid expenses (3,780) Accounts payable (merchandise creditors) (7,980) Accrued expenses payable (operating expenses) 1,260 Income tax payable (2,660) a. Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the direct method. Use the minus sign to indicate cash outflows, cash payments, decreases in cash, or any negative adjustments.

Answer 1

Using the direct method, we calculated the net cash provided by operating activities to be $109,760. This was done by adjusting the income statement figures with changes in respective working capital accounts.

Step-by-step explanation:

Cash Flows from Operating Activities (Direct Method)

To prepare the Cash Flows from the Operating Activities section using the direct method, we start with the income statement items and adjust for changes in working capital accounts from the balance sheet. Below is a step-by-step calculation:

• Start with cash collected from customers: Sales of $511,000 minus a decrease in Accounts Receivable of $11,760 results in cash collected of $522,760.
• Next, calculate cash payments to suppliers: Cost of Merchandise Sold of $290,500 plus an increase in Inventories of $3,920, minus a decrease in Accounts Payable of $7,980 resulting in cash paid to suppliers of $286,440.
• Then calculate cash payments for operating expenses: Other Operating Expenses of $105,000 plus a decrease in Prepaid Expenses of $3,780, minus an increase in Accrued Expenses Payable of $1,260 results in cash paid for other operating expenses of $107,520.
• Finally, subtract cash paid for income taxes: Income Tax Expense of $21,700 minus a decrease in Income Tax Payable of $2,660 results in cash paid for income taxes of $19,040.

Summing up all adjustments, the total cash provided by operating activities is calculated as:

Cash Collected from Customers: $522,760
Less: Cash Paid to Suppliers: ($286,440)
Less: Cash Paid for Other Operating Expenses: ($107,520)
Less: Cash Paid for Income Taxes: ($19,040)
Net Cash Provided by Operating Activities: $109,760