![]() ![]() The income statement for the year 2013 shows a net sales of $177,000. The above concept can be summarized as below: Example :ĪBC company sells goods on account. The decrease in accounts receivable is, therefore, added to the net sales figure to calculate cash received from customers.Ĭash received from customers = Net sales + Decrease in accounts receivable If accounts receivable at the end of the year are less than at the beginning of the year (a decrease in accounts receivable), it means the company’s collections from customers are more than credit sales. (ii) If accounts receivable decrease during the period: The net sales figure is available from the income statement and increase or decrease in accounts receivable can be calculated by using beginning and ending balances of the accounts receivable. The increase in accounts receivable is, therefore, deducted from the net sales figure to calculate cash received from customers.Ĭash received from customers = Net sales – Increase in accounts receivable ![]() If accounts receivable at the end of the year are more than at the beginning of the year (an increase in accounts receivable), it means the company’s credit sales are more than its collections from customers. The procedure is given below: (i) If accounts receivable increase during the period: These are net sales, beginning balance of accounts receivable, and ending balance of accounts receivable. A company that sells goods on account can calculate the cash received from customers during the period by using three figures. Therefore, the amount of sales revenues generated during a certain period is mostly differs from the amount of cash received from customers during that period. Most of the companies make sales on cash as well as on account. In today’s business world, however, we can rarely find a company that sells all the goods for cash. If all the sales are made for cash then the amount of sales revenue and cash received from customers should be equal. Following is the explanation of how each item can be worked out. To calculate cash receipts and payments in the above format we use relevant data from income statement, comparative balance sheet and some additional information. A comprehensive format of operating activities section under direct method is illustrated below: Under direct method, the operating cash receipts and disbursements described above are arranged in a certain way. cash paid to suppliers of merchandise (or raw materials),. ![]() The operating cash disbursements (i.e., outflows) usually include the following: The operating cash receipts (i.e., inflows) usually include the following: If the total of operating cash receipts, on the other hand, is less than the total of operating cash disbursements, the resulting figure is known as the “net cash used by operating activities”. If the total of all operating cash receipts for the period is greater than the total of all operating cash disbursements, the resulting figure is known as the “net cash provided by operating activities”. The total of operating cash disbursements are deducted from the total of operating cash receipts to arrive at net cash flows from operating activities. Under direct method, the major classes of operating cash receipts and disbursements are reported separately in the operating activities section. ![]() This article explains the use of direct method to learn about indirect method, please read “operating activities section by indirect method” article. It is the first and the most complex of the three sections of statement of cash flows and is prepared by using either direct or indirect method. The operating activities section reports the cash flows arising from operating activities of a company during a particular period. ![]()
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