Refer to the financial statements presented in P13.5A for E-Perform, Inc.
Instructions
(a) Prepare the statement of cash flows using the direct method.
(b) E-Perform's cash position doubled between 2017 and 2018. Identify the primary reason(s) for this significant increase.
SOLUTION
(a)
E-PERFORM, INC.
Statement of Cash Flows—Direct Method
Year Ended December 31, 2018
Operating activities
Cash receipts from customers (1) $459,980
Cash payments
To suppliers (2) $(199,410)
For operating expenses (3) (50,310)
For income tax (45,000)
For interest (4,730) (299,450)
Net cash provided by operating activities 160,530
Investing activities
Disposal of equipment $ 1,500
Purchase of equipment (Note X) (25,000)
Net cash used by investing activities (23,500)
Financing activities
Sale of common shares $ 25,000
Repayment of bank loan payable (100,000)
Payment of cash dividends (12,630)
Net cash used by financing activities (87,630)
Net increase in cash 49,400
Cash, January 1 48,400
Cash, December 31 $ 97,800
Note X to the Statement of Cash Flows: During the year, the company purchased equipment costing $85,000 by
paying $25,000 cash and issuing a $60,000 bank loan payable.
Note: Calculations follow below.
Calculations
(1) Cash receipts from customers
Sales $492,780
Deduct: Increase in accounts receivable (32,800)
Cash receipts from customers $459,980
(2) Cash payments to suppliers
Cost of goods sold $185,460
Add: Increase in inventory 29,650
Cost of purchases 215,110
Deduct: Increase in accounts payable (15,700)
Cash payments to suppliers $199,410
(3) Cash payments for operating expenses
Operating expenses from income statement $116,410
Deduct: Depreciation expense (46,500)
Loss on disposal of equipment (7,500)
Decrease in prepaid expenses (7,600)
Increase in accrued liabilities (4,500)
Cash payments for operating expenses $ 50,310
(b) E-Perform’s cash position has increased primarily because of significant amounts of cash generated from its operating activities. Cash from operating activities increased the company’s cash account by $160,530. Some of this cash was used to purchase equipment, repay its bank loans, and pay dividends, but sufficient cash remained at the end of the year to increase its cash position by $49,400.