Question

Presented below is the income statement of Cowan, Inc.:

         Sales revenue                                                                         $380,000

         Cost of goods sold                                                                    225,000

         Gross profit                                                                             $155,000

         Operating expenses                                                                    95,000

         Income before income taxes                                                      60,000

         Income taxes                                                                              24,000

         Net income                                                                             $ 36,000

In addition, the following information related to net changes in working capital is presented:

                                                                                                              Debit                     Credit

         Cash                                                                                          $12,000

         Accounts receivable                                                                   25,000

         Inventories                                                                                                              $19,400

         Salaries payable (operating expenses)                                        8,000

         Accounts payable                                                                                                     14,000

         Income taxes payable                                                                  3,000

The company also indicates that depreciation expense for the year was $16,700 and that the deferred tax liability account increased $2,600.

Prepare a schedule computing the net cash flow from operating activities that would be shown on a statement of cash flows:

(a)   using the indirect method.

(b)   using the direct method.

Answer 1

A schedule computing the net cash flow from operating activities (Indirect Method)
Net Income	$36,000.00
Adjustments to Net Income :
Depreciation	$16,700.00
Increase in Accounts receivables	-$25,000.00
Decrease in Inventories	$19,400.00
Decrease in Salaries Payable	-$8,000.00
Increase in Accounts Payable	$14,000.00
Decrease in Income Tax payable	-$3,000.00
Increase in Deferred tax liability	-$2,600.00
Net Cash flow from Operating activities	$47,500.00
A schedule computing the net cash flow from operating activities (Direct Method)
Cash collected from Sales	$355,000.00
Cah payment for purchases	-$191,600.00
Cash payment for expenses	-$86,300.00
Cash payment for Income tax	-$29,600.00
Net Cash flow from Operating activities	$47,500.00
Working
Cash collected from sales
Sales revenue	$380,000.00
Less : Increase in Accounts receivables	$25,000.00
Cash collected from sales	$355,000.00
Cash payment for Purchases
Cost of goods sold	$225,000.00
Less : Decrease in Inventories	$19,400.00
Less : Increase in Accounts payable	$14,000.00
Cash payment for Purchases	$191,600.00
Cash payment for expenses
Operating expenses	$95,000.00
Less : Depreciation	$16,700.00
Add : Decrease in Salaries payable (Operating exp.)	$8,000.00
Cash payment for expenses	$86,300.00
Cash payment for Income Taxes
Income taxes	$24,000.00
Add : Decrease in Income Tax payable	$3,000.00
Add : Increase in deferred tax liability	$2,600.00
Cash payment for Income Taxes	$29,600.00