Question

Portions of the financial statements for Parnell Company are provided below.

PARNELL COMPANY Income Statement For the Year Ended December 31, 2018 ($ in 000s)
Revenues and gains:
Sales	$	700
Gain on sale of buildings		10		$	710
Expenses and loss:
Cost of goods sold	$	250
Salaries		110
Insurance		30
Depreciation		113
Interest expense		40
Loss on sale of machinery		13			556
Income before tax					154
Income tax expense					77
Net income				$	77

PARNELL COMPANY Selected Accounts from Comparative Balance Sheets December 31, 2018 and 2017 ($ in 000s)
	Year
		2018			2017		Change
Cash	$	124		$	110		$	14
Accounts receivable		314			226			88
Inventory		331			415			(84	)
Prepaid insurance		65			78			(13	)
Accounts payable		200			127			73
Salaries payable		122			103			19
Deferred income tax liability		80			62			18
Bond discount		183			210			(27	)

Required:

1. Prepare the cash flows from operating activities section of the statement of cash flows for Parnell Company using the direct method.
2. Prepare the cash flows from operating activities section of the statement of cash flows for Parnell Company using the indirect method.

Answer 1

1.

Cash flows from operating activities under direct method:

Cash flow from Operating activities (Direct):
Cash receipts from customers (700 - 88)			612
Cash paid to suppliers (250 - 84 - 73)			-93
Salaries paid (110 - 19)			-91
Insurance paid (30 - 13)			-17
Interest expense (40 - 27)			-13
taxes payable (77 - 18)			-59
Net Cash flow from operating activities			339

2.

Cash flows from operating activities under indirect method:

Cash flows from Operating activities (Indirect)
Net income for the year		77
Adjustment required for reconciliation:
Depreciation		113
Loss on sale of machinery		13
Amortization of discount		27
Increase in Accounts receivable		-88
Decrease in inventory		84
Decrease in Prepaid insurance		13
Increase in Accounts payable		73
Increase in Salaries payable		19
Increase in Deferred tax liability		18
gain on sale of building		-10
Net Cash flow from operating activities		339