Part (a) includes options of : Add , Deduct , No effect Question 5 The following
ID: 2430295 • Letter: P
Question
Part (a) includes options of : Add , Deduct , No effect
Question 5 The following is a list of income statement accounts that must be converted from the accrual basis to the cash basis in order to calculate cash provided (used) by operating activities using the direct method For each of the below income statement accounts, identify if (a) the change in the current asset or current liability account stated in the second column should be added or deducted from the income statement account in order to convert the accrual-based number to a cash-based number; and (b) the title of the resulting cash receipt or payment on the statement of cash flows. The first one has been done for you as an example Add or Deduct from Income Statement Account Add Income Statement Change in Current Asset/ Related Cash Receipt or Payment Cash receipts from customers Account 1. Sales revenue 2. Dividend revenue 3. Interest revenue 4. Rent revenue 5. Cost of goods sold 6. Cost of goods sold 7. Insurance expense 8. Salaries expense 9. Interest expense Current Liability Account Decrease in accounts receivable Increase in dividends receivable Decrease in interest receivable Decrease in unearned rent Decrease in inventory Decrease in accounts payable Decrease in prepaid insurance Decrease in salaries payable Increase in interest payable Decrease in income tax payable Cash payments for operating expenses Cash receipts from customers Cash payments for income tax Cash receipts from dividends Cash receipts from interest Cash payments to suppliers Cash payments to employees Cash payments for interest 10. Income tax expenseExplanation / Answer
Income Statement Accounts
Changes in Current Assets/Current Liabilities Accounts
(a)
(b)
Add or Deduct from Income statement Account
Related cash receipts or payments
1
Sales revenue
Decrease in Accounts Receivables
Add
Cash Receipts from Customers
2
Dividend Revenue
Increase in Dividend Receivable
Deduct
Cash Receipts from Dividends
3
Interest revenue
Decrease in Interest Receivable
Add
Cash Receipts from Interest
4
Rent revenue
Decrease in Unearned Rent
Deduct
Cash Receipts from Customers
5
Cost of goods Sold
Decrease in Inventory
Add
Cash Payment to supplier
6
Cost of goods Sold
Decrease in Accounts Payable
Deduct
Cash Payment to supplier
7
Insurance Expenses
Decrease in Prepaid Insurance
Add
Cash payment for operating Expenses
8
Salaries expense
Decrease in salaries payable
Deduct
Cash payment for operating Expenses
9
Interest Expense
Increase in Interest payable
Add
Cash Payment for Interest
10
Income tax expense
Decrease in Income tax payable
Deduct
Cash payment for income taxes
Explanation
As per accrual system we consider actual earned incomes such as rent earned, Interest earned etc and Expenses accrued even though they are not paid yet.
Increase in current asset would mean that cash is used and if current assets are decreased then it means cash is received. For Current Liabilities it works in opposite way, when current liability increase it means cash is increased and when liability is decrease it means cash is paid.
Income Statement Accounts
Changes in Current Assets/Current Liabilities Accounts
(a)
(b)
Add or Deduct from Income statement Account
Related cash receipts or payments
1
Sales revenue
Decrease in Accounts Receivables
Add
Cash Receipts from Customers
2
Dividend Revenue
Increase in Dividend Receivable
Deduct
Cash Receipts from Dividends
3
Interest revenue
Decrease in Interest Receivable
Add
Cash Receipts from Interest
4
Rent revenue
Decrease in Unearned Rent
Deduct
Cash Receipts from Customers
5
Cost of goods Sold
Decrease in Inventory
Add
Cash Payment to supplier
6
Cost of goods Sold
Decrease in Accounts Payable
Deduct
Cash Payment to supplier
7
Insurance Expenses
Decrease in Prepaid Insurance
Add
Cash payment for operating Expenses
8
Salaries expense
Decrease in salaries payable
Deduct
Cash payment for operating Expenses
9
Interest Expense
Increase in Interest payable
Add
Cash Payment for Interest
10
Income tax expense
Decrease in Income tax payable
Deduct
Cash payment for income taxes