Compute cash from operating activities under the direct and indirect methods.
Explanation of Solution
Statement of cash flows: This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.
Direct method: Under direct method, cash receipts from customers (
Operating activities: Operating activities include cash inflows and outflows from business operations.
The below table shows the way of calculation of cash flows from operating activities using direct method:
Cash flows from operating activities (Direct method) |
Add: Cash receipts. |
Cash receipt from customer |
Dividend received |
Interest received |
Less: Cash payments: |
To supplier for acquisition of inventory |
To employees |
For interest on loans |
Income tax expenses and other operating expenses |
Net cash provided from or used by operating activities |
Table (1)
Indirect method: Under indirect method, net income is reported first, and then non-cash expenses, losses from fixed assets, and changes in opening balances and ending balances of current assets and current liabilities are adjusted to reconcile the net income balance.
Cash flows from operating activities: Operating activities refer to the normal activities of a company to carry out the business.
The below table shows the way of calculation of cash flows from operating activities using indirect method:
Cash flows from operating activities (Indirect method) |
Net income: |
Add: Decrease in current assets |
Increase in current liability |
|
Loss on sale of plant assets |
Deduct: Increase in current assets |
Decrease in current liabilities |
Gain on sale of plant assets |
Net cash provided from or used by operating activities |
Table (2)
Compute cash from operating activities under the direct method:
Statement of Cash Flows Direct Method (Partial) | ||
Details | Amount ($) | Amount ($) |
Cash flows from operating activities: | ||
Cash receipts: | ||
Cash received from customers | 530 | |
Total cash receipts | 530 | |
Cash payments: | ||
Cash paid to employees | (350) | |
Total cash payments | (350) | |
Net cash provided by operating activities | $180 |
Table (3)
Working notes:
Calculate the amount of cash received from customers:
Calculate the amount of cash paid to employees:
Compute cash from operating activities under the indirect method:
Statement of Cash Flows - Indirect Method | ||
Details | Amount ($) | Amount ($) |
Cash flows from operating activities: | ||
Net Income | 200 | |
Adjustment to reconcile net income to net cash provided by operating activities: | ||
Changes in current assets and current liabilities: | ||
Decrease in accounts receivable | 30 | |
Decrease in wages payable | (50) | (20) |
Net cash provided by operating activities | $180 |
Table (4)
Working note:
Calculate the amount of net income:
Therefore, the net cash flows from operating activities under the direct and indirect method are $180.
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Chapter 23 Solutions
College Accounting, Chapters 1-27
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- Accounts receivable arising from sales to customers amounted to $80,000 and $71,000 at the beginning and end of the year, respectively. Net income reported on the income statement for the year was $293,000. Exclusive of the effect of the other adjustments, the cash flow from operating activities to be reported in the indirect statement of cash flows is arrow_forwardSmoltz Company reported the following information for the current year: cost of goods sold, $252,500; increase in inventory, $21,700; and increase in accounts payable, $12,200. What is the amount of cash paid to suppliers that Smoltz would report on its statement of cash flows under the direct method? a. $218,600 c. $262,000 b. $243,000 d. $286,400arrow_forwardIn the current year, Harrisburg Corporation had net income of 35,000, a 9,000 decrease in accounts receivable, a 7,000 increase in inventory, an 8,000 increase in salaries payable, a 13,000 decrease in accounts payable, and 10,000 in depreciation expense. Using the indirect method, prepare the operating activities section of its statement of cash flows based on this information.arrow_forward
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