22.5: Preparing a Statement of Cash flows using the Direct method

Question 1

What is Step 1 in preparing a statement of cash flows using the direct method?

Answer 1

Step 1 is to determine the change in cash by calculating the difference between the beginning and ending cash balances.

Question 2

What is Step 2 in preparing a statement of cash flows using the direct method?

Answer 2

Step 2 involves recording information from the income statement into the operating activities section.

This requires adjusting the income statement figures to reflect cash-based transactions.

Question 3

What are the key cash flow adjustments in the direct method for Tax Consultants Inc.?

Answer 3

For Tax Consultants Inc., the adjustments included:

Cash received from customers: $125,000 (adjusted for an increase in accounts receivable),
Cash paid to suppliers: $85,000 (adjusted for accounts payable),
Income taxes paid: $6,000.

Question 4

What is Step 3 in preparing a statement of cash flows using the direct method?

Answer 4

Step 3 is to analyze the changes in each statement of financial position account to identify all cash flows associated with changes in the account balances.

Question 5

How do changes in accounts receivable and accounts payable affect cash flow from operating activities?

Answer 5

An increase in accounts receivable results in a reduction of cash received from customers.

An increase in accounts payable leads to a reduction in cash payments to suppliers.

Question 6

What are the primary cash flows from financing activities for Tax Consultants Inc. in 2023?

Answer 6

Proceeds from the issue of common shares: $60,000,
Payment of dividends: $14,000.

Question 7

What are the final subtotals for the statement of cash flows for Tax Consultants Inc. (2023)?

Answer 7

Cash flows from operating activities: $3,000,
Cash flows from financing activities: $46,000,
Increase in cash: $49,000.