Question

Costco Wholesale Corporation operates more than 600 warehouse stores in the United States and abroad. The following items were in a slightly simplified version of the company’s statement of cash flows for the fiscal year ending August 28,2011 (in millions):

Increase in merchandise inventories	$ 642
Net income	1,542
Depreciation and amortization	855
Other noncash expenses	269
Increase in payables	804
Increase in other operating liabilities, net	451
Increase in receivables	81

The company’s income statement showed (in millions):

Total revenues	$88,915
Cost of merchandise	77,739
Operating expenses	8,737
Operating income	2,439
Other expenses, net	56
Income before income taxes	2,383
Income tax	841
Net income	$ 1,542

b) Prepare a statement of cash flows from operating activities using the direct method. Assume that all other expenses and income taxes were paid in cash, all operating liabilities relate to operating expenses, and that all depreciation and other noncash expenses are included in operating expenses.

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Answer 1

Workings:
Customers a/c
	Debit		Credit
Credit sales	88915	Cash recd.(Bal.fig.)	88834
		Increase	81
	88915		88915
Merchandise inventory
		COGS	77739
Purchases(Bal.fig.)	78381	Increase	642
	78381		78381
Payables a/c
Cash paid(Bal.Fig.)	77577
Increase	804	Purchases	78381
	78381		78381
Opg. Liabilities a/c
Cash paid(Bal.fig.)	7218	New liabilities incurred(8737+56-855-269)	7669
Increase	451
	7669		7669

Cash flows from operating activities (Direct method)
1.Cash receipts from customers(88915+81)	88834
2.Cash payments to suppliers(77739+642-804)	77577
3.Cash paid tow.opg.liab.(8737+56-855-269-451)	7218
4.Income tax paid	841
Cash generated from operating activities(1-2-3-4)	3198
VERIFICATION:
Cash flows from operating activities (InDirect method)
Net income	1542
Add: Adj.for non-cash expenses
Depreciation and amortization	855
Other noncash expenses	269
Adjusted Net income	2666
Changes to working capital:
Less: increase in merchandise invetories	-642
Add: Increase in payables	804
Add: Increase in opg.liab.	451
Less: increase in recivables	-81
Cash generated from operating activities	3198