University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

87

Pages:

11
Author:

Outrahimath6lv

The Direct Method of Determining the Net Cash Provided by Operating Activities. 13-49 Learning Objective 5 Use the direct method to determine the net cash provided by operating activities. 13-50 Computing Net Cash Provided by Operating Activities The direct method computes net cash provided by operating activities by reconstructing the income statement on the cash basis from top to bottom. However The amount of net cash provided by operating activities under the direct method will always agree with the amount computed using the indirect method. 13-51 Similarities and Differences in Handling Data Revenue or Expense Item Sales revenue (as reported) Adjustments to a cash basis: 1 Increases in accounts receivable 2 Decreases in accounts receivable Cost of goods sold (as reported) Adjustments to a cash basis: 3 Increase in merchandise inventory 4 Decrease in merchandise inventory 5 Increase in accounts payable 6 Decrease in accounts payable Operating expenses (as reported) Adjustments to a cash basis: 7 Increase in prepaid expenses 8 Decrease in prepaid expenses 9 Increase in accrued liabilities 10 Decrease in accrued liabilities 11 Period's depreciation, depletion and amortization charges Income tax expense (as reported) Adjustments to a cash basis: 12 Increase in accrued taxes payable 13 Decrease in accrued taxes payable 14 Increase in deferred income taxes 15 Decrease in deferred income taxes Add (+) or Deduct (-) to Adjust to a Cash Basis + + + + + - + + Adjustments for accounts that affect revenue are the same in the direct method and indirect methods. Adjustments for accounts that affect expenses are handled in opposite ways for the direct and indirect methods. 13-52 Direct Method: Gains and Losses Regarding gains and losses on sale of assets, no adjustments are needed at all under the direct method. 13-53 The Direct Method Ed's Pizza Hut Comparative Balance Sheet Account Balances Cash Accounts Receivable Inventory Land Equipment Accumulated Depr. Accounts Payable Salaries Payable Note Payable - Joe Doe Common Stock Retained Earnings 3/31/2008 Change 3/31/2009 DR (CR) DR (CR) Incr. (Decr.) $ 71,000 $ 90,000 $ (19,000) 23,000 40,000 (17,000) 322,000 300,000 22,000 68,000 100,000 (32,000) 112,000 84,000 28,000 (45,000) (39,000) 6,000 (38,000) (27,000) 11,000 (9,000) (14,000) (5,000) (50,000) (50,000) (500,000) (450,000) 50,000 (4,000) (34,000) (30,000) $ - $ - Let’s revisit the comparative balance sheet account balances for Ed’s Pizza Hut. 13-54 The Direct Method Ed's Pizza Hut Income Statement For the Year Ended 3/31/2009 Sales $ 1,000,000 Cost of goods sold 750,000 Gross margin 250,000 Operating expenses 277,000 Net loss $ (27,000) Let’s assume that Ed’s Pizza Hut prepared this income statement. 13-55 The Direct Method Step 1: Translate sales revenue into cash collected from customers. Sales (as reported) Add: Decrease in accounts receivable Cash collected from customers $ $ 1,000,000 17,000 1,017,000 13-56 The Direct Method Step 2: Translate cost of goods sold into cash disbursements for purchases. Cost of goods sold (as reported) $ Add: Increase in inventory Less: Increase in accounts payable Cash paid for purchases $ 750,000 22,000 (11,000) 761,000 13-57 The Direct Method Step 3: Translate operating expenses into cash paid for operating expenses. Operating expenses (as reported) Add: Decrease in salaries payable Less: Increase in depreciation Cash paid for operating expenses $ $ 277,000 5,000 (6,000) 276,000 There is not an adjustment needed for income taxes because Ed’s Pizza Hut has a net loss of $27,000. 13-58 The Direct Method Ed's Pizza Hut Statement of Cash Flows For the Period Ending 3/31/2009 Operating Activities $ 1,017,000 Cash received from customers Cash paid for purchases (761,000) Cash paid for operating expenses (276,000) Net cash flow from operations (20,000) Investing Activities Proceeds from sale of land 32,000 Purchase of equipment (28,000) Net cash flow from investing activities 4,000 Financing Activities Dividends paid (3,000) Net change in cash (19,000) Cash, beginning 90,000 Cash, ending $ 71,000 Notice that the net cash provided by operating activities agrees with that computed using the indirect method.