Question

• 1. What are the major advantages of the indirect method of reporting cash flows from operating activities?

• 2. A corporation issued $200,000 of common stock in exchange for $200,000 of fixed assets. Where would this transaction be reported on the Statement of Cash Flows?
• 3. A corporation issued $5,000,000 of 20 year bonds for cash at 105. How would the transaction be reported on the Statement of Cash Flows?
• 4. Is depreciation a source of cash flow? 5. When a statement of cash flows is prepared using the direct method, what are some of the operating cash flows?

Answer 1

Answers:- 1. The major advantages of the indirect method of reporting cash flows from operating activities are:- (a) Indirect method is conceivably easier to enumerate.

(b) under it, data is more easily available and less costly to attain.

(c) It reports the necessary adjustments to rectify net income and net cash or used by operating activities.

2. This transaction would be reported in a separate schedule of Non-cash Investing and Financing activities in the statement of cash flows. Because, there is no cash involved and it does represent a important change in the company's financial position.

3. The transaction would be reported in the Cash flows from financing activities - Issuance of bonds. It is calculated as:- ($5,000,000*105%) = $5,250,000 (It is Increases in cash flow from financing activities).

4. NO, Depreciation is not a source of cash flow, because depreciation expense is reported as a positive amount while preparing the cash flow statement under the Indirect Method. Despite, the reason it is listed is to adjust the net income amount that turned out to be reduced by the depreciation expense on the Income Statement.

5. Under Direct method, the difference between cash receipts from customers and cash paid to suppliers and other operating expenses represents " cash generated from operations". The direct method is also known as Income Statement Method. In the operating section, any interest paid on outstanding debt is also reported along with all income taxes paid.

So, Operating section format will be:-

(a) Cash flow from Revenue

(b) Less- Cash payments for expenses

(c) = Income Before Income taxes

(d) Less- Cash payment for income taxes

(e) = Net Cash Flow From Operating Activities.