Question

The net income reported on the income statement for the current year was $210,000.  Depreciation recorded on equipment and a building amount to $62,500 for the year.  Balances of the current asset and current liabilities accounts at the beginning and end of the year are as follows:

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	End of Year	Beginning of Year
Cash	$ 56,000	$ 59,500
Accounts receivable (net)	71,000	73,400
Inventories	140,000	126,500
Prepaid expenses	7,800	8,400
Accounts payable (merchandise creditors)	62,600	66,400
Salaries payable	9,000	8,250

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(a)	Prepare the cash flows from operating activities section of the statement of cash flows, using the indirect method.
(b)	If the direct method had been used, would the net cash flow from operating activities have been the same?  Explain.

Answer 1

Part A: Cash Flow from Operating Activities:

Cash Flow from Operating Activities (Indirect Method)
Particulars	Amount	Amount
Net Income		$   2,10,000.00
Adjustments:
(1) Depreciation on fixed assets		$       62,500.00
(2) Decrease / (Increase) in current assets		$      -10,300.00
(a) Accounts Receivable	$ 2,400.00
(b) Inventories	$ -13,500.00
(c) Prepaid Expenses	$              800.00
(3) Increase / (Decrease) in Current Liabilities		$        -3,050.00
(a) Accounts Payable	$ -3,800.00
(b) Salaries Payable	$              750.00
Cash flow from Operating Activities		$ 2,59,150.00

Note: Changes in Cash during the year is not considered in the Operating Cash flow, since the ultimate aim of Cash flow statement is to match the activities with difference between Opening and Closing cash balances.

Part B:

The cash flow from operating activities will be the same irrespective of the method used (i.e. Direct Method or Indirect Method )