Question

E5.16  

(Preparation of Partial Statement of Cash Flows—Operating Activities)

(LO 8, 9) The statement of income of Kneale Transport Inc. for the year ended December 31, 2020, reported the following condensed information:

Kneale Transport Inc. Year Ended December 31, 2020 Statement of Income
Service revenue		$545,000
Operating expenses		370,000
Income from operations		175,000
Other revenues and expenses
Gain on disposal of equipment	$25,000
Interest expense	10,000	15,000
Income before income tax		190,000
Income tax		42,000
Net income		$148,000

Kneale's statement of financial position included the following comparative data at December 31:

	2020	2019
Accounts receivable	$50,000	$60,000
Prepaid insurance	8,000	5,000
Accounts payable	30,000	41,000
Interest payable	2,000	750
Income tax payable	8,000	4,500
Unearned revenue	10,000	14,000

Additional information:

Operating expenses include $70,000 in depreciation expense. The company follows IFRS. Assume that interest is treated as an operating activity for purposes of the statement of cash flows.

Instructions

a.  

Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2020, using the

• 1.indirect method and

• 2.direct method.

b.  

From the perspective of an external user of Kneale Transport's financial statements, discuss the usefulness of the statement of cash flows prepared using either the indirect or the direct method.

Answer 1

Answer:

a.  

1. indirect method

Kneale Transport Inc.
Partial Statement of Cash Flows
For the Year Ended December 31, 2020
Cash flows from operating activities
Net income		148,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	70,000
Gain on sale of equipment	(25,000)
Decrease in accounts receivable	10,000
Increase in prepaid insurance	(3,000)
Decrease in accounts payable	(11,000)
Increase in interest payable	1,250
Increase in income taxes payable	3,500
Decrease in unearned revenue	(4,000)	41,750
Net cash provided by operating activities		189,750

2. direct method.

Kneale Transport Inc.
Partial Statement of Cash Flows
For the Year Ended December 31, 2020
Cash flows from operating activities
Cash received from customers		551,000
Cash payments
For operating expenses	314,000
For interest	8,750
For income tax	38,500	361,250
Net cash provided by operating activities		189,750

b.

In the indirect method, we look mainly the variances between net income and cash flow from operating  activities. In the direct method, it deals with the operating cash receipts and payments and these are more coherent as it shows the company’s sources of cash and its uses.

The indirect cashflow statement will be useful as it can be used as a connection between the income statement, and the statement of financial position. The direct statement will be useful as it helps in estimating future cash flow from operating activities.

Calculation:

1.a.

Here we need to prepare the partial cashflow statement using the indirect method.

In the indirect method, we need to add/deduct the changes in the asset and liability accounts from the net income generated in a period to calculate the cash flow.

So here the net income is 148,000. And then to that we need to do the adjustments to reconcile net income to net cash provided by operating activities.

That is adding Depreciation expense and then deducting the Gain on sale of equipment. Then we need to include the following:

	2020	2019	Difference to report
Decrease in accounts receivable	50,000	60,000	10,000
Increase in prepaid insurance	8,000	5,000	(3,000)
Decrease in accounts payable	30,000	41,000	(11,000)
Increase in interest payable	2,000	750	1,250
Increase in income taxes payable	8,000	4,500	3,500
Decrease in unearned revenue	10,000	14,000	(4,000)

1.b.

Here we need to prepare the partial cashflow statement using the direct method.

In the direct method, it calculates the changes in cash receipts and payments, that are reported in the cash flow from the operations section.

So first we need to calculate the Cash received from customers as below:

Revenues from fees	545,000
Add: Decrease in accounts receivable	10,000
Less: Decrease in unearned revenue	(4,000)
Cash receipts from customers	551,000

Then we need to calculate the Cash payments for operating expenses as below:

Operating expenses	300,000
Add: Increase in prepaid insurance	3,000
Decrease in accounts payable	11,000
Cash payments for operating expenses	314,000

Then we need to calculate the Cash payments for interest expense as below:

Interest expense	10,000
Less: Increase in interest payable	(1,250)
Cash payments for interest	8,750

And last we need to calculate the Cash payments for income tax as below:

Income tax expense	42,000
Less: Increase in income tax payable	(3,500)
Cash payments for income tax	38,500