Question

The following accounts and corresponding balances were drawn from Marinelli Company's Year 2 and Year 1 year-end balance sheets.

Account Title
Accounts receivable
Interest receivable
Other operating expenses payable
Salaries payable
The Year 2 income statement is shown next.
Income Statement
Sales
Salary expense
Other operating expenses
Operating income
Nonoperating items: Interest revenue
Net income
a.
b.
Year 2
$35,200
4,200
Cash inflows from operating activities
Cash outflows from operating activities
21,000
6,500
Year 1
$31,600
4,800
18,500
7,200
Required
a. Use the direct method to compute the amount of cash inflows from operating activities.
b. Use the direct method to compute the amount of cash outflows from operating activities.
$530,000
(214,000)
(175,000)
141,000
16,500
$157,500

Answer 1

The cash inflows from operating activities are calculated as $533,600 by adjusting sales revenue for the increase in accounts receivable. The cash outflows from operating activities are calculated as $392,200 by summing the salary and other operating expenses and adjusting for the changes in related payables.

Step-by-step explanation:

Cash Inflows from Operating Activities

To calculate the cash inflows from operating activities using the direct method, you need to adjust the sales revenue for changes in accounts receivable. Here's the calculation:

Sales Revenue: $530,000

Decrease in Accounts Receivable (Year 1 - Year 2): ($31,600 - $35,200) = -$3,600 (an increase, thus it is a negative adjustment)

Total Cash Inflows from Operating Activities: $530,000 - (-$3,600) = $533,600

Cash Outflows from Operating Activities

To calculate the cash outflows for operating activities, sum the salary expense and other operating expenses from the income statement, then adjust for changes in their related payables:

Salary Expense: $214,000

Other Operating Expenses: $175,000

Decrease in Salaries Payable (Year 1 - Year 2): ($7,200 - $6,500) = $700 (a decrease, thus it is a positive adjustment)

Decrease in Other Operating Expenses Payable (Year 1 - Year 2): ($18,500 - $21,000) = $2,500 (a decrease, thus it is a positive adjustment)

Total Cash Outflows from Operating Activities: ($214,000 + $175,000) + ($700 + $2,500) = $392,200