Question

Problem 21-8 Cash flows from operating activities (direct method and indirect method)-deferred income tax liability and amortization of bond discount [LO21-3, 21-4]

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	$	750
Gain on sale of buildings		11		$	761
Expenses and loss:
Cost of goods sold	$	275
Salaries		115
Insurance		35
Depreciation		118
Interest expense		45
Loss on sale of machinery		13			601
Income before tax					160
Income tax expense					80
Net income				$	80

PARNELL COMPANY Selected Accounts from Comparative Balance Sheets December 31, 2018 and 2017 ($ in 000s)
	Year
		2018			2017		Change
Cash	$	129		$	105		$	24
Accounts receivable		319			221			98
Inventory		326			420			(94	)
Prepaid insurance		71			83			(12	)
Accounts payable		205			122			83
Salaries payable		112			98			14
Deferred income tax liability		70			57			13
Bond discount		180			205			(25	)

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

Direct method
Statement of cash flow
Cash flows from operating activities
Cash inflows
From customers 750-98	652
Cash outflow		652
Payment to suppliers 275+94-83	-286
Payment of Insurance 35+12	-47
Paymentof salaries 115+14	-129
Payment of Income tax 80+13	-93
Payment of Interest 45-25	-20	273
Net cash from operating activities		273.00
Indirect method
Statement of cash flow
Cash flows from operating activities
net income		$80
Adjustments to convert net income to cash basis
Depreciation expenses	118
Loss on sale of machinery	13
Gain on sale of Building	-11
Increase in Accounts receivable	-98
Decrease in Inventories	94
increase in Accounts Payable	83
Decrease in prepaid rent	-12
Increase in salaries payable	14
Decrease in Bond discount	-25
Increase in Deferred Income tax liabilty	13
		189
Net cash from operating activities		269