Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $511,000
Cost of merchandise sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290,500
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $220,500
Operating expenses:
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,200
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,000
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,200
Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,300
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,700
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,600
Changes in the balances of selected accounts from the beginning to the end of the
current year are as follows:
Increase
Decrease*
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,760*
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,920
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,780*
Accounts payable (merchandise creditors) . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,980*
Accrued expenses payable (operating expenses) . . . . . . . . . . . . . . . . . . . . . 1,260
Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,660*
a. Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the direct method.
b. What does the direct method show about a company’s cash flows from operating activities that is not shown using the indirect method?
Answer:
a. Cash flows from operating activities:
Cash received from customers………………… $522,760
1
Deduct: Cash payments for merchandise… $302,400
2
Cash payments for operating
expenses……………………………… 99,9603
Cash payments for income taxes… 24,360 426,720
Net cash flow from operating activities……… $ 96,040
Computations:
1. Sales……………………………………………………………… $511,000
Add decrease in accounts receivable……………………… 11,760
Cash received from customers……………………………… $522,760
2. Cost of merchandise sold…………………………………… $290,500
Add: Increase in inventories………………………………… $3,920
Decrease in accounts payable………………………… 7,980 11,900
Cash payments for merchandise…………………………… $302,400
3. Operating expenses other than depreciation…………… $105,000
Deduct: Decrease in prepaid expenses…………………… $3,780
Increase in accrued expenses
payable……………………………………………… 1,260 5,040
Cash payments for operating expenses…………………… $ 99,960
4. Income tax expense…………………………………………… $ 21,700
Add decrease in income tax payable……………………… 2,660
Cash payments for income taxes…………………………… $ 24,360
b. The direct method directly reports cash receipts and payments. The cash received
less the cash payments is the net cash flow from operating activities. Individual
cash receipts and payments are reported in the Cash Flows from Operating
Activities section.
The indirect method adjusts accrual-basis net income for revenues and expenses
that do not involve the receipt or payment of cash to arrive at cash flows from
operating activities.