Question

The income statement of Booker T Industries Inc. for the current year ended June 30 is as follows:

1	Sales		$510,600.00
2	Cost of goods sold		294,400.00
3	Gross profit		$216,200.00
4	Operating expenses:
5	Depreciation expense	$39,000.00
6	Other operating expenses	105,910.00
7	Total operating expenses		144,910.00
8	Income before income tax		$71,290.00
9	Income tax expense		22,690.00
10	Net income		$48,600.00

Changes in the balances of selected accounts from the beginning to the end of the current year are as follows:

	Increase (Decrease)
Accounts receivable (net)	($12,330)
Inventories	4,290
Prepaid expenses	(2,780)
Accounts payable (merchandise creditors)	(8,620)
Accrued expenses payable (operating expenses)	1,050
Income tax payable	(2,520)

Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the direct method. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries. In the operating activities section, use the minus sign to indicate cash outflows, decreases in cash and a net cash outflow, if required.

b. What does the direct method show about a company’s cash flows from operating activities that is not shown using the indirect method?

a. Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the direct method. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries. In the operating activities section, use the minus sign to indicate cash outflows, decreases in cash and a net cash outflow, if required.

Cash Flows from Operating Activities Section

1	Cash flows from operating activities:
2
3
4
5
6

Answer 1

Solution a:

Computation of cash received from customers
Particulars	Amount
Sales	$510,600.00
Add: Decrease in Accounts receivables	$12,330.00
Cash received from customers	$522,930.00

Computation of cash paid for inventory to supplier
Particulars	Amount
Cost of Goods Sold	$294,400.00
Add: Increase in inventory	$4,290.00
Purchases made during the year	$298,690.00
Add: Decrease in Accounts payable	$8,620.00
Cash paid for inventory to supplier	$307,310.00

Computation of cash paid for Other Operating Expenses
Particulars	Amount
Other Operating expenses	$105,910.00
Less: Decrease in prepaid expenses	$2,780.00
Less: Increase in accrued expense payable	$1,050.00
Cash paid for operating expenses	$102,080.00

Computation of cash paid for Income Tax
Particulars	Amount
Income tax expense	$22,690.00
Add: Decrease in income tax payable	$2,520.00
Cash paid for income tax	$25,210.00

Addison Controls
Statement of Cash Flows
For Year Ended December 31, 2013
Particulars	Details	Amount
Cash Flows from operating activities:
Collection from customers	$522,930.00
Payment for inventory to supplier	-$307,310.00
Payment for operating expenses	-$102,080.00
Payment for income tax	-$25,210.00
Net Cash provided by operating activities		$88,330.00

Solution b:

Direct method show exact amount of cash received from operation and cash paid in operation i.e. cash received from customer, cash paid to supplier, cash paid for expenses etc. However in indirect method cash receipt and payment is not shown from different sources. In indirect method, net income is adjusted for increase and decrease in working capital items and non cash items to arrive at cash flow from operating activites.