Question

Skysong Corporation had the following 2020 income statement.

Sales revenue $210,000
Cost of goods sold 119,000
Gross proht 91,000
Operating expermen (includies depreciation of $22,000) 47,000
Net income $44,000

The following accounts increased during 2020: Accounts Receivable $11,000, Inventory $12,000, and Accounts Payable $12,000. Prepare the cash flows from operating activities section of Skysong's 2020 statement of cash flows using the direct method.

Answer 1

To calculate the cash flows from operating activities using the direct method, adjust the sales revenue for the change in accounts receivable, then adjust cost of goods sold for changes in inventory and accounts payable, and finally, remove non-cash expenses such as depreciation from the operating expenses. The result is a net cash provided by operating activities.

Step-by-step explanation:

When calculating the cash flows from operating activities using the direct method, we need to adjust the income statement figures by considering changes in operating accounts. The operating activities section reflects the cash receipts and cash payments during the year. The following is how to prepare this section based on the given information:

• Start with cash collected from customers. This is sales revenue adjusted for the increase in accounts receivable. Thus, $210,000 - $11,000 = $199,000.
• Cash paid to suppliers is calculated by adjusting the cost of goods sold for changes in inventory and accounts payable. So, $119,000 + $12,000 - $12,000 = $119,000.
• Finally, cash paid for operating expenses must exclude non-cash expenses (like depreciation) and reflect any changes in accrued liabilities. Given operating expenses of $47,000 including $22,000 depreciation, the cash paid for operating expenses is $47,000 - $22,000 = $25,000.

Note that the net cash provided by operating activities ($55,000) is different from the net income ($44,000) due to the changes in operating assets and liabilities.