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# Computation of Operating Activities-Direct Method

(Computation of Operating Activities-Direct Method)

Presented below are two independent situations.

Situation A:
Chenowith Co. reports revenues of \$200,000 and operating expenses of \$110,000 in its first year of operations, 2010. Accounts receivable and accounts payable at year-end were \$71,000 and \$39,000, respectively. Assume that the accounts payable related to operating expenses. Ignore income taxes.

Instructions (Enter amounts as positive numbers.)

Using the direct method, compute net cash provided (used) by operating activities and highlight whether used or provided

Situation B:
The income statement for Edgebrook Company shows cost of goods sold \$310,000 and operating expenses (exclusive of depreciation) \$230,000. The comparative balance sheet for the year shows that inventory increased \$21,000, prepaid expenses decreased \$8,000, accounts payable (related to merchandise) decreased \$17,000, and accrued expenses payable increased \$11,000.

Instructions (Enter amounts as positive numbers.)

Compute:
(a) cash payments to suppliers \$

(b) cash payments for operating expenses \$

#### Solution Preview

A -

Cash receipts from customers (we need to take revenue minus A/R at year end) 129,000
Cash payments (this would therefore be expenses minus A/P at year ...

#### Solution Summary

This solution provides calculations and explanations to the Chenowith Co. exercise and to the Edgebrook Company exercise. All questions are answered with calculations.

\$2.19