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	$	880
Gain on sale of buildings		10		$	890
Expenses and loss:
Cost of goods sold	$	340
Salaries		128
Insurance		48
Depreciation		131
Interest expense		58
Loss on sale of machinery		13			718
Income before tax					172
Income tax expense					86
Net income				$	86

PARNELL COMPANY Selected Accounts from Comparative Balance Sheets December 31, 2018 and 2017 ($ in 000s)
	Year
		2018			2017		Change
Cash	$	150		$	92		$	58
Accounts receivable		340			208			132
Inventory		313			441			(128	)
Prepaid insurance		58			104			(46	)
Accounts payable		226			109			117
Salaries payable		118			85			33
Deferred income tax liability		76			60			16
Bond discount		182			216			(34	)

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

Cash flows from operating activities using direct method:
	Amount ($'000)	Amount ($'000)
Cash received from accounts receivable (Note 10	748.00
Cash paid to accounts payable (Note 2)	(95.00)
Salaries paid in cash	(95.00)
Insurance premium paid in cash (Note 4)	(94.00)
Cash flows from operating activities (Note 5)	464.00
Less: Income tax paid in cash (Note 6)	70.00
Net cash flows from operating activities		394.00

Note:

Note 1
Opening accounts receivable	208
Add: Sales (Assuming credit sales)	880
	1088
Less: Closing accounts receivable	340
Cash received accounts receivable	748

Note 2
Opening accounts payable	109
Add: Purchases during the year (Note 3)	212
	321
Less: Closing accounts payable	226
Cash paid to accounts payable	95

Note 3
Closing inventory	313
Add: Cost of goods sold	340
	653
Less: Opening inventory	441
Purchases during the year	212

Note 4
Salaries payable opening	85
Add; Salaries expenses for the year	128
	213
Less: Closing salaries payable	118
Salaries paid in cash	95

Note 5
Closing prepaid insurance	104
Add: Insurance expenses	48
	152
Less: opening prepaid insurance	58
Insurance premium paid in cash	94

Note 6
Opening income tax payable balance	60
Add: income tax expenses	86
	146
Less: Closing income tax payable	76
Income tax paid during the year	70

                    

Cash flows from operating activities using indirect method:
	Amount ($'000)	Amount ($'000)
Net income before tax		172
Add / (less):
Gain on sale of building being non-operating activities	-10
Depreciation being non-operating expenses	131
Interest expenses being non-operating expenses	58
Loss on sale of machine being non-operating expenses	13
		192
		364
Add/ (Less): (Increase)/ decrease in working capital
Decrease in working capital (435 - 335)		100
		464
Less: Income tax paid		70
		394

Note: changes in working capital:

	2018		2017
Cash	150		92
Accounts receivable	340		208
Inventory	313		441
Prepaid insurance	58		104
Total current assets		861		845
Less: Total current liabilities
Accounts payable	226		109
Salaries payable	118		85
Bond discount	182		216
		526		410
Working capital		335		435
Decrease in working capital in 2018 (559 - 367)	100