Question

Freeport Company's income statement for last year is as follows:

Income Statement
Sales	$300,000
Less: Cost of goods sold	200,000
Gross margin	100,000
Less: Operating expenses	60,000
Income before taxes	40,000
Less: Income taxes	16,000
Net income	$24,000

The beginning and ending balances for last year are available for the following accounts:

	Ending balance		Beginning balance
Accounts receivable	$32,000		$40,000
Inventory	60,000		50,000
Prepaid expenses	12,000		8,000
Accumulated depreciation	(40,000)		(30,000)
Accounts payable	30,000		45,000
Accrued liabilities	16,000		10,000
Income taxes payable	2,000		5,000

Required:

Using the direct method, prepare the operating activities section of the statement of cash flows. Amounts to be deducted should be indicated by a minus sign.

Freeport Company
Operating Activities Section
	$
Adjustments for conversion to cash basis:
		$
Adjustments for conversion to cash basis:
Adjustments for conversion to cash basis:
Adjustments for conversion to cash basis:
Net cash flows from operating activities

Answer 1

Note: Accrued liabilities exist only in accrual method of accounting.Depreciation expense is a non cash expense so it is not computed in cash flows under direct method.