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Dreamworks International Operating section of Cash Flows, Direct Method

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
REBECCA SHERRICK COMPANY
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.)

Instructions
Prepare the operating activities section of the statement of cash flows using the direct
method.

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.

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