Question

1. Cash Flows from Operating Activities—Indirect Method

   The net income reported on the income statement for the current year was $313,300. Depreciation recorded on equipment and a building amounted to $93,700 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows:

   	End of Year		Beginning of Year
   Cash	$78,330		$81,460
   Accounts receivable (net)	99,320		100,520
   Inventories	195,830		173,180
   Prepaid expenses	10,890		11,490
   Accounts payable (merchandise creditors)	87,490		90,910
   Salaries payable	12,610		11,320

   a. Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method. Use the minus sign to indicate cash out flows, cash payments, decreases in cash, or any negative adjustments.

   Statement of Cash Flows (partial)
   Cash flows from operating activities:
   	$
   Adjustments to reconcile net income to net cash flow from operating activities:
   Changes in current operating assets and liabilities:
   Net cash flow from operating activities		$

   b. If the direct method had been used, would the net cash flow from operating activities have been the same?
   

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Answer 1

(a)
Cash Flow from Operating Activities
Net Income	$ 313,300
Add: Depreciation	$ 93,700
Adjustments to reconcile Net income to
- Decrease in Accounts Receivable                ( $ 100,520 (-) $ 99,320 )	$ 1,200
- Increase in Inventories               ( 173,180 (-) 195,830 )	($ 22,650)
- Decrease in Prepaid Expenses              ( $ 11,490 (-) 10,890 )	$ 600
- Decrease in Accounts Payable               ( $ 87,490 (-) $ 90,910 )	($ 3,420)
- Increase in Wages Payable                ( $ 12,610 (-) $ 11,320 )	$ 1,290
Net Cash Provided by Operating Activities	$ 384,020
(b)
Under indirect method, the difference between the Operating cash receipts and payments is the net Cash flow from operating Activities, Where as the amount of Net cash Flow is Same under both the Direct and indirect Methods.