Financial Accounting: An Integrated Statements Approach, 2nd Edition

For Rundell Inc., the amount of cash payments for merchandise is $785,200, as de-

termined below.

Cost of merchandise sold $790,000

Deduct decrease in inventories (8,000)

Add decrease in accounts payable 3,200

Cash payments for merchandise $785,200

The $8,000 decrease in inventoriesindicates that the cost of merchandise sold ex-

ceeded the cost of the merchandise purchased by $8,000. The amount reported on the

income statement for cost of merchandise sold therefore includes $8,000 that did not

require a cash outflow during the year. Therefore, $8,000 is deducted from the cost of

merchandise sold in determining the cash payments for merchandise.

The $3,200 decrease in accounts payable(merchandise creditors) indicates a cash

outflow that is excluded from cost of merchandise sold. In other words, the decrease

in accounts payable indicates that cash payments for merchandise were $3,200 more

than the purchases on account during 2007. Thus, $3,200 is added to the cost of mer-

chandise sold in determining the cash payments for merchandise.

Cash Payments for Operating Expenses

The $7,000 of depreciation expense reported on the income statement did not require

a cash outflow. Under the direct method, it is not reported on the statement of cash

flows. Instead, the $196,000 reported for other operating expenses is adjusted to reflect

the cash payments for operating expenses, as summarized below.

For Rundell Inc., the amount of cash payments for operating expenses is $193,800,

determined as follows:

Operating expenses other than depreciation $196,000

Deduct increase in accrued expenses 2,200

Cash payments for operating expenses $193,800

The increase in accrued expenses(operating expenses) indicates that operating ex-

penses include $2,200 for which there was no cash outflow (payment) during the year.

In other words, the increase in accrued expenses indicates that the cash payments for

operating expenses were $2,200 less than the amount reported as an expense during

the year. Thus, $2,200 is deducted from the operating expenses on the income state-

ment in determining the cash payments for operating expenses.

Gain on Sale of Land

The income statement for Rundell Inc. in Exhibit 7 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.

594 Chapter 13 Statement of Cash Flows

Cash payments

for operating

 Decrease in accrued expenses expenses

or

 Increase in accrued expenses



Operating

expenses

other than

depreciation

(reported on

the income

statement)