Mastering Cash Flow Statements: Indirect vs

. Direct Methods

School

Brooklyn College, CUNY**We aren't endorsed by this school

Course

ACCT 3001

Subject

Accounting

Date

Dec 12, 2024

Pages

Uploaded by AdmiralGalaxy15819

474 Chapter 12 Reporting Cash Flows NEED..T Now 12-5 Comparative balance sheets, an income statement, and additional information follow. COMPREHENSIVE Preparing Statement of Cash Flows—Indirect ; and Direct Methods Assets Sales A8 TS i e $446,100 Cashi 8t $ 43,050 $ 23,925 Cost of goodssold.............$222,300 Accounts receivable 34,125 39,825 Operating expenses Iventon, . . 156,000 146,475 (excluding depreciation) . 120,300 Prepaid expenses ................3,600 1,650 Depreciation expense 25,500 (368,100) Total current assets...............236775 211875 78,000 Equipment 135,825 146,700 Other gains (losses) Accum. depreciation—Equipment ... (61,950) (47,550) Loss on sale of equipment ... 3,300 Totalassets 0ot Lanh ., $310,650 $311,025 Loss on retirement of bonds..... 825 (4,125 e Income before taxes ...........73,875 Liabilities Income tax expense ...........(13,725) Accounts payable . .. $ 28,800 $ 33,750 Netincome .. . st rmae g $ 60,150 Income taxes payable 5,100 4,425 il : = Dividends payable ...............0 4,500 e - o - Total current liabilities..............33,900 42,675 Additional Information for the Current Year Bonds payable: s ser orsen otk 0 37,500 a. Equipment costing $21,375 with accumulated Totalliabilitiess- s vmonin cmmis o 33,900 80,175 depreciation of $11,100 is sold for cash. - b. Equipment purchases are for cash. Equity c. Accumulated Depreciation is affected by depreciation Common stock, $10par...........168,750 168,750 expense and the sale of equipment. d. The balance of Retained Earnings is affected by dividend declarations and net income. Retained earnings Total liabilities and equity 108,000 62,100 $310,650 $311,025 . All sales are made on credit. . All inventory purchases are on credit. . Accounts Payable balances result from inventory purchases. f=zwo .o . Prepaid expenses relate to Operating Expenses. Required 1. Prepare a statement of cash flows using the indirect method for the current year. 2° Prepare a statement of cash flows using the direct method for the current year. SOLUTION Supporting computations for cash receipts and cash payments for the current year. . ()= Costiotequipmentssold® ... ... i e $21,375 (3) Beg.Ret.Earn. + NetlIncome — Div. Declared = End. Ret. Earn. 3 Accumulated depreciation of equipment sold . i (11,100) $62,100 $60,150 $14,250 $108,000 1 Book value of equipmentsold. ......................10,275 Loss on sale of equipment. . . 3,300) Beg. Div. Pay. + Div. Declared — Div.Paid = End. Div. Pay. Cash received from sale of equipment................$ 6,975 $4,500 $14,250 $18,750 $0 Costofedupmentsold: 5ot s s $21,375 (4P Salestival it = ok e e 0 B $ 446,100 Less decrease in the Equipment account balance Add decrease in accounts receivable...........5,700 Cash paid for new equipment.......................Cash received from customers ................$451,800 (2) Loss on retirement of bonds ........................(6)F Costofgoodssald.. LS il 00 $ 222,300 Carrying value of bonds retired. . ....................Plus increase ininventory ....................9,525 Cash paldtoretiehonds - ..o o i iiir .. Purchases = = i oo — U n i e L 231,825 P - S e = Plus decrease in accounts payable. 4,950 *Supporting T-account analysis for part 1 follows. Cash paid for inventory T 5236775 5 . 2 o Eoiniont T B e (6) Oper.atmg exp.enses (e.xcludmg depreciation) ... . $ 120,300 Plus increase in prepaid expenses .............1,950 Dol Dec3i, Bal., Dec. 31, Cash paid for operating expenses .............$122,250 - Prior Year 146,700 Prior Year 47,550 % = | Cashpurchase 10,500 |Sale 21375 Sale 11,100 | Depr, expense 25,500 (7)° Income tax expense. ... $ 13725 E Less increase in income taxes payable. 675) " Bal,Dec.31, Bal., Dec. 31, i . $ 13.050 ] Current Year 135,825 Current Year 61,950 gl e T 2220

1. Indirect method. Cash flows from operating activities Netincome mams s cai - aba s venpumiianny Adjustments to reconcile net income to net cash provided by operating activities Income statement items not affecting cash Depreciation expense ...............c......Loss on sale of plantassets.................Loss on retirement of bonds ................Changes in current assets and current liabilities Decrease in accounts receivable. ............Increase in Inventorye . s s o o Increase in prepaid expenses ...............Decrease in accounts payable. ..............Increase in income taxes payable............Net cash provided by operating activities Cash flows from investing activities Cash received from sale of equipment. ............Cash paid for equipment. . . Net cash used in investing activities ..............Cash flows from financing activities Cash paid to retire bonds payable ................Cashpaldderdividends e ot cas o s Net cash used in financing activities ..............Netincreasetincash... . ... . vvomuiwniin sO0RAE vuss Cash balance at prioryear-end. ....................Cash balance at currentyear-end. ..................25,500 3,300 825 5,700 (9,525) (1,950) (4,950) 675 (38,325) (18,750) $79,725 (3,525) (57,075) $19,125 23,925 $43,050 Chapter 12 Reporting Cash Flows 475 28 Direct method (Appendix 12B). Cash flows from operating activities Cash received from customers. ............$ 451,800 Cash paid for inventory 3 (236,775) Cash paid for operating expenses..........(122,250) Cash paid forincome taxes ...............(13,050) Net cash provided by operating activities. . . . $79,725 Cash flows from investing activities Cash received from sale of equipment . ... .. 6,975 Cash paid for equipment .................(10,500) Net cash used in investing acti (3,525) Cash flows from financing activities Cash paid to retire bonds payable. .........(38,325) Cash paid for dividends (18,750) Net cash used in financing activities . .......(57,075) Netincreaseincashs s ommmmiis v vnsvis $19,125 Cash balance at prior year-end . Cash balance at current year-end T Spreadsheet Preparation of the Statement of Cash Flows This appendix explains how to use a spreadsheet (work sheet) to prepare the statement of cash flows under the indirect method. Preparing the Indirect Method Spreadsheet A spreadsheet, also called work sheet, can help us prepare a statement of cash flows. To demonstrate, we return to the comparative balance P4 lllustrate use of a spread- sheet to prepare a statement of cash flows. sheets and income statement shown in Exhibit 12.10. We use letters a through g to code changes in accounts, and letters A through m for additional information, to prepare the statement of cash flows. a. Net income is $38,000. b. Accounts receivable increase by $20,000. c. Inventory increases by $14,000. d. Prepaid expenses increase by $2,000. e. Accounts payable decrease by $5,000. . Interest payable decreases by $1,000. =