Parmesan Company uses the direct method for its statement of cash flow. It reports the following information regarding the year 2014: From the income statement:
Sales Revenues, $265,000
Cost of Goods Sold, $210,000
Operating expenses, $31,000
Net Income $24,
From the balance sheet:
$$\begin{array} { | l | r | r | }
\hline & \text { Beginning Balance } & \text { Ending Balance } \
\hline \text { Accounts Receivable: } & \$ 14,500 & \$ 17,800 \
\hline \text { Inventory: } & 23,500 & 17,800 \
\hline \text { Accounts Payable: } & 6,000 & 13,500 \
\hline \text { Accrued Liabilities: } & 4,000 & 1,500 \
\hline
\end{array}$$ Assume that there were no sales of long-term assets, no Interest Revenue, and no expenses other than the expenses shown above. Also, assume that Accounts Payable are for purchases of inventory only. On the statement of cash flows, what amount will be shown for the net cash flow from operating activities?

Question

Parmesan Company uses the direct method for its statement of cash flow. It reports the following information regarding the year 2014: From the income statement:
Sales Revenues, $265,000
Cost of Goods Sold, $210,000
Operating expenses, $31,000
Net Income $24,
From the balance sheet:
$$\begin{array} { | l | r | r | } 
\hline & \text { Beginning Balance } & \text { Ending Balance } \
\hline \text { Accounts Receivable: } & \$ 14,500 & \$ 17,800 \
\hline \text { Inventory: } & 23,500 & 17,800 \
\hline \text { Accounts Payable: } & 6,000 & 13,500 \
\hline \text { Accrued Liabilities: } & 4,000 & 1,500 \
\hline
\end{array}$$ Assume that there were no sales of long-term assets, no Interest Revenue, and no expenses other than the expenses shown above. Also, assume that Accounts Payable are for purchases of inventory only. On the statement of cash flows, what amount will be shown for the net cash flow from operating activities?

Quizplus · Accepted Answer

The net cash flow from operating activities can be calculated using the direct method as follows:

Cash Receipts from Customers:
Sales Revenues: $265,000
Add: Decrease in Accounts Receivable: $17,800 - $14,500 = $3,300
Cash Receipts from Customers: $265,000 + $3,300 = $268,300

Cash Payments for Inventory:
Cost of Goods Sold: $210,000
Less: Decrease in Inventory: $23,500 - $17,800 = $5,700
Cash Payments for Inventory: $210,000 - $5,700 = $204,300

Cash Payments for Operating Expenses:
Operating Expenses: $31,000
Add: Decrease in Accrued Liabilities: $4,000 - $1,500 = $2,500
Cash Payments for Operating Expenses: $31,000 - $2,500 = $28,500

Net Cash Flow from Operating Activities:
Net Cash Flow from Operating Activities = Cash Receipts from Customers - Cash Payments for Inventory - Cash Payments for Operating Expenses
Net Cash Flow from Operating Activities = $268,300 - $204,300 - $28,500
Net Cash Flow from Operating Activities = $35,500

Therefore, the correct answer is B) $31,400.

Parmesan Company Uses the Direct Method for Its Statement of Cash