Zumbrunn Company’s income statement contained the following condensed information. ZUMBRUNN COMPANY Income Statement For the Year Ended December 31, 2020 Service revenue $969,200 Operating expenses, excluding depreciation $624,900 Depreciation expense 54,100 Loss on disposal of plant assets 24,000 703,000 Income before income taxes 266,200 Income tax expense 40,100 Net income $226,100 Zumbrunn’s balance sheets contained the comparative data at December 31, shown below. 2020 2019 Accounts receivable $74,700 $60,600 Accounts payable 41,600 28,000 Income taxes payable 11,600 6,200 Accounts payable pertain to operating expenses. Prepare the operating activities section of the statement of cash flows using the direct method.

A statement of cashflow is one of the Financial statements statutorily required of a Business. It highlights the uses of Cash and Cash generating activities within a financial year. It helps assess a business from a cash point of view, and gives a discerning investor a better risk assessment of the reported profitability of the Business

It is assessed on 3 main pedestals:

1.Operating Activities. This typically reflects the cash related activities in our operations by identifying entries in both income statement and the Current sides of the balance sheet

2. The investing Activities : cash related activities in investment & disposal of Capital Assets and also cash involved in purchasing & selling off of Securities (otherwise called investments)

3. Financing Activities: cash related activities in changing the equity position of the business. E.g selling of shares, repurchase of shares, payment of dividends

The aggregation of cash changes in all 3 levels is what makes up the statement of cashflow.

The direct method of cashflow statement is one of the 2 prescribed methods; the other is the Indirect method.

The direct method identifies the specific activities responsible for cash movement in a year and presents it to Users of financial statements to review, while the indirect is always derived and thus doesn't speak to the specificity of these activities responsible for changes in cash balances.

Most business use the indirect method because of it's simplicity.

Workings:

Step 1. Identify Cash receipts from Customers:

Revenue in 2020 = $969,200

Add Last year receivables = $60,600

Deduct current period receivables = -$74,700

Cash receipts from Customers = $955,100

Step 2. Identify Cash paid to Suppliers & Employees:

Operation expenses = -$624,900

Add Last years Payables = -$41,600

Deduct current years payables = -$28,000

Cash paid to Suppliers & Employees = -$638,500

Step 3. Identify Income taxes paid:

Income tax Expenses = -$40,100

Add Last years Payables = -$11,600

Deduct current years payables = -$6,200

Income taxes paid = -$45,500