Accounting: The Language of Business - Vol. 1 (Part 100)

We must investigate without fear or favour the so-called 'accounting irregularities' that cause turmoil in the markets and wipe billions off the investments of ordinary South Africans.

Cyril Ramaphosa

 Statement of Cash Flows (Part F)

by

Charles Lamson

Gain on Sale of Land

The income statement for Rundell Inc. in Exhibit 7, from part 99 and reintroduced below, reports a gain of $12,000 on the sale of land. As we discussed previously, the gain is included in the proceeds from the sale of land which is reported as part of the cash flows from investing activities.

EXHIBIT 7 Balance Sheet and Income Statement Data for Direct Method

Interest Expense

The income statement for Rundell Inc. in Exhibit 7 reports interest expense of $8,000. The interest expense is related to the bonds payable that were outstanding during the year. We assume that interest on the bond is paid on June 30 and December 31. Thus, $8,000 cash outflow for interest expense is reported on the statement of cash flows as an operating activity.

If interest payable had existed at the end of the year, the interest expense would be adjusted for any increase or decrease in interest payable from the beginning to the end of the year. That is, a decrease in interest payable would be added to interest expense and an increase in interest payable would be subtracted from interest expense. This is similar to the adjustment for changes in income taxes payable, which will be illustrated in the following paragraphs.

Cash Payments for Income Taxes

The adjustment to convert the income tax reported on the income statement to the cash basis is summarized below.

For Rundell Inc., cash payments for income tax are $85,500, determined as follows:

The cash outflow for income taxes exceeded the income tax deducted as an expense during the period by $500. Thus, $500 is added to the amount of income tax reported on the income statement in determining the cash payments for income tax.

Reporting Cash Flows from Operating Activities---Direct Method

Exhibit 8 is a complete statement of cash flows for Rundell Inc., using the direct method for reporting cash flows from operating activities. The portions of this statement that differ from the indirect method are highlighted in color. Exhibit 8 also includes the separate schedule reconciling net income and net cash flow from operating activities. The schedule must accompany the statement of cash flows when the direct method is used. The schedule is similar to the cash flows from operating activities section of the statement of cash flows prepared using the indirect method. 

EXHIBIT 8 Statement of Cash Flows---Direct Method

*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 657-658*

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