Question

The following information is available from Dust Corporation’s accounting records for the year ended December 31,...

The following information is available from Dust Corporation’s accounting records for the year ended December 31, 2019:

Cash received from customers

$620,000

Investment revenue recognized

30,000

Cash paid to suppliers and employees

510,000

Advertising Expense

95,000

Cash dividends paid

30,000

Depreciation of fixed assets

15,000

Bad debt expense

12,500

Required:

  1. Compute cash flow provided by operations for 2019.
  2. Justify the exclusion of any of the above items from calculating cash flow from operating activities?

Homework Answers

Answer #1

(A) Operating cash flow - cash flow from the normal working of a business. Cash generated from the operating activities of the business. There are 2 methods, direct method and indirect method.

Under the direct method, we take cash receipts and subtract the cash expenses incurred for operating segment.

Under the indirect method, we take the net income and make it operating cash flow by removing the effect of noncash item, expenses & income not of operating nature.

As per the given information, we can calculate the operating cash flow by direct method since we are not given information about Net Income.

Cash flow from operation for the year 2019 = Cash received from customers - Cash paid to suppliers and employees = 620,000 - 510,000 = $ 110,000

(B) Items excluded

Investment revenue recognized - this is an item of investing activity. The nature is not operating

Advertising Expense - this is not an operating expenses. Operating expenses are those which pertain to the main business/core functions of the business

Cash dividend paid - this is an item of financing activity

Depreciation of fixed asset - this is non cash expense, would have been used in case we applied Indirect method to compute operating cash flow

Bad debt expense - This expenses would have been taken into account if we had applied Indirect method to compute operating cash flow.

( if you have any query, please post in the comment I will reply in the comments)

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