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    Dreamworks International Operating section of Cash Flows, Direct Method

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    The income statement of Dreamworks International Co. for the year ended December 31, 2002, reported the following condensed information.

    Morgan Erin
    Corporation Corporation
    Cash provided by operations $300,000 $300,000
    Average current liabilities 50,000 100,000
    Average total liabilities 200,000 250,000
    Net income 200,000 200,000
    Sales 400,000 800,000
    Income Statement
    For the Year Ended December 31, 2002
    Sales $7,100,000
    Cost of goods sold
    Beginning inventory $1,700,000
    Purchases 5,430,000
    Goods available for sale 7,130,000
    Ending inventory 1,920,000
    Cost of goods sold 5,210,000
    Gross profit 1,890,000
    Operating expenses
    Selling expenses 380,000
    Administrative expense 525,000
    Depreciation expense 75,000
    Amortization expense 30,000 1,010,000
    Net income $ 880,000
    Revenue from fees $470,000
    Operating expenses 280,000
    Income from operations 190,000
    Income tax expense 47,000
    Net income $143,000

    Dreamworks' balance sheet contained the following comparative data at December 31.
    Dreamworks has no depreciable assets. (Accounts payable pertains to operating expenses.)

    Prepare the operating activities section of the statement of cash flows using the direct

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    Solution Preview

    Please see the attached file.

    Cash flow from operating activities - The direct method following is the underlying formula for the direct method of computing the operating activities section of a cash flow statement:
    Cash Received from Sales of Goods and Services
    - Cash Paid for Operating Goods and Services
    = Cash Flow from Operating Activities.

    The operating activities section of a cash-flow statement reports the information listed below. These are the line items that you will need to fill in to complete a cash flow statement.
    Cash Flow from Operating Activities:
    (+) Cash received from customers
    (+) Other operating cash receipts (if any)
    (-) Cash paid to suppliers (including suppliers of inventory, insurance, advertising, etc.)
    (-) Cash paid to employees
    (-) Interest paid
    (-) Income taxes paid
    (-) Other ...

    Solution Summary

    The solution explains the procedure and the reasons for which amounts are included in the operating section of the Statement of Cash Flows, and provides a schedule for the answer.