Question

The 2019 accounting records of Larkspur, Inc. reveal these transactions and events. Payment of interest $ 10,300 Collection of accounts receivable $190,900

Cash sales 50,400
Payment of salaries and wages 57,000
Receipt of dividend revenue 18,900
Depreciation expense 15,800
Payment of income taxes 16,000
Proceeds from sale of vehicles 12,200
Net income 38,200
Purchase of equipment for cash 22,900
Payment of accounts payable for merchandise 114,000
Loss on sale of vehicles 2,400
Payment of dividends 13,400
Payment for land 73,500
Payment of operating expenses 27,400

Prepare the cash flows from operating activities section using the direct method. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)

Answer 1

Larkspur, Inc.

Cash Flows from Operating Activities Section, using the direct method:

Collection of accounts receivable $190,900

Cash sales $50,400

Payment of salaries and wages -$57,000

Receipt of dividend revenue $18,900

Payment of accounts payable for merchandise -$114,000

Payment of operating expenses -$27,400

Income before Taxes = $61,800

Payment of interest -$10,300

Payment of income taxes -$16,000

Net cash from operating activities = $ 35,500

Step-by-step explanation:

1. The Cash Flow Statement is one of the Financial Statements prepared by an entity periodically. It has three sections: the operating activities, financing activities, and investing activities. The operating activities are concerned with the normal business activities of the entity. The financing activities section deals with how funds are raised to finance the entity's business. The investing activities section deals with the acquisition of long-term assets for generating income.

2. The direct method is one of the two methods of preparing cash flows from operating activities. This method uses the actual cash flows. It does not adjust the net income with non-cash transactions as the indirect method does.

3. Depreciation expense is not a cash flow item. It is normally added back to the net income when the indirect method is used. Proceeds from sale of long-term assets are reported in the investing activities section and not in the operating section. Net income is used with the indirect method. Purchase of equipment is an investing activity. Loss on sale of vehicles is not a cash flow item just like Depreciation expense. Payment for land is an investing activity. These transactions are not included in the operating activities section of the cash flow statement.

4. Using the direct method, the listing of information this way for the operating activities provides the financial statement user with a more detailed view of a company’s cash inflows and outflows. For this purpose, the Financial Accounting Standards Board (FASB) recommends that companies use the direct method.

It has its drawbacks. However, it is more helpful for investors and creditors that the statement of cash flows using the direct method reports the direct sources of cash receipts and payments.