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prepare a statement of cash flows - Indirect Method

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Problem #7
The life of the construction contract is 4 years. The firm used the percentage-of-completion method. Under this method, cash collected and revenues recognized are shown below. Total cost of the project was $ 800,000. What portion of the total cost was incurred each year?

Problem #8
Based on the following information, prepare a statement of cash flows for Year 2. Use the Indirect Method


Solution Preview

Hi there,

Here is some info for you regarding % of Completion Method and the Cash Flow Statement.

Percentage-of-completion method says that if (1) the contract clearly specifies the price and payment options with transfer of ownership, (2) the buyer is expected to pay the whole amount and (3) the seller is expected to complete the project, then revenues, costs, and gross profit can be recognized each period based upon the progress of construction (that is, percentage of completion). For example, if during the year, 25% of the building was completed, the builder can recognize 25% of the expected total profit on the contract. This method is preferred. However, expected loss should be recognized fully and immediately due to conservatism principle.

source: http://en.wikipedia.org/wiki/Revenue_recognition

The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions. The operating cash flows section of the cash flow statement under the indirect method would appear something like this:

Profit before interest and income taxes ...