Question

The net income reported on the income statement for the current year was $323,000. Depreciation recorded on equipment and a building amounted to $90,060 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows:

	End of Year	Beginning of Year
Cash	$89,700	$95,670
Accounts receivable (net)	111,690	119,220
Inventories	226,850	194,630
Prepaid expenses	12,730	14,220
Accounts payable (merchandise creditors)	96,000	103,120
Salaries payable	15,630	13,010

Required:

A.	Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries. Use the minus sign to indicate cash outflows, cash payments, decreases in cash and for any adjustments, if required.
B.	If the direct method had been used, would the net cash flow from operating activities have been the same?

Answer 1

Solution A:

Statement of Cash Flows (partial) Indirect Method

1	Cash flows from operating activities:
2	Net Income		$323,000
3	Adjustments to reconcile net income to net cash flow from operating activities:
4	Depreciation (on equipment and a building)	$90,060
5	Changes in current operating assets and liabilities:
6	Decrease in Accounts receivable (net)	$7,530
7	Decrease in Prepaid expenses	$ 1,490
8	Increase in Salaries payable	$ 2,620
9	Increase in Inventories	-$ 32,220
10	Decrease in Accounts payable (merchandise creditors)	-$7,120	$ 62,360
11	Cash Flows from Operating Activities		$ 385,360

Answer B:

Yes, if the direct method had been used, the net cash flow from operating activities would have been the same.

Note: Some of the items required for direct method are missing like cost of goods sold, sales etc. If provided, I would have shown working for direct method too. Partial calculation for direct method is as follows:

Statement of Cash Flows (partial) Direct Method

Cash flows from operating activities:
Cash received from customers (WN 1)		$ 7,530
Cash payments to suppliers (WN 2)		$ 35,230

Working Notes (WN):

1: Cash received from customers:

= Accounts Receivable, net beginning -Accounts Receivable, net ending

= $ 119,220 - $ 111,690

=$ 7,530

2: Cash payments to suppliers:

= Accounts payable (merchandise creditors) beginning -Accounts Payable (merchandise creditors) ending + Inventory ending – Inventory beginning + Prepaid expenses ending – Prepaid expenses beginning- Increase in salaries payable

=$ 103,120 - $ 96,000 + $ 226,850 - $ 194,630 + $ 12,730 - $ 14,220 - $ 2,620

=$ 35,230