Which method do you prefer in determining net cash flow from operating activities, the direct method or the indirect method? Explain.© BrainMass Inc. brainmass.com October 25, 2018, 2:29 am ad1c9bdddf
Both methods have their advantages -
Indirect method - This provides a reconciliation of the net income and the operating cash flows and so shows how the net income under the accrual method is related to cash flows from operating activities
Direct method - This method lists the cash inflows and outflows related to ...
The solution explains which method should be preferred in preparing the cash flow from operating activities section
Preparing cash flows using indirect method and analyzing
Attached are questions and problems, please show work with explanations of how results were obtained.
The statement of cash flows is one of the four primary financial statements.
1. Describe the content and layout of a statement of cash flows, including its three sections.
2. List at least three transactions classified as investing activities in a statement of cash flows.
3. List at least three transactions classified as financing activities in a statement of cash flows.
4. List at least three transactions classified as significant noncash financing and investing activities in the statement of cash flows.
Classify the following cash flows as operating, investing, or financing activities:
1. Sold long-term investments for cash.
2. Received cash payments from customer.
3. Paid cash for wages and salaries.
4. Purchased inventories for cash
5. Paid cash dividends.
6. Issued common stock for cash
7. Received cash interest on a note.
8 . Paid cash interest on outstanding bond
9. Received cash from sale of land at a loss.
10. Paid cash for property taxes on building.
Analyses of sources
and uses of cash A1 A2
Financial data from three competitors in the same industry follow.
1. Which of the three competitors is in the strongest position as shown by its statement of cash flows?
2. Analyze and discuss the strength of Z-Best's cash flow on total assets ratio to that of Lopez.
Kazaam Company, a merchandiser, recently completed its calendar-year 2005 operations. For the year,
(1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers,
(3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash
payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid
Expenses. Kazaam's balance sheets and income statement follow:
Additional Information on Year 2005 Transactions
a. The loss on the cash sale of equipment is $5,125 (details in b).
b. Sold equipment costing $46,875, with accumulated depreciation of $28,125, for $13,625 cash.
c. Purchased equipment costing $96,375 by paying $25,000 cash and signing a long-term note payable
for the balance.
d. Borrowed $3,750 cash by signing a short-term note payable.
e. Paid $31,375 cash to reduce the long-term notes payable.
f. Issued 2,500 shares of common stock for $18 cash per share.
g. Declared and paid cash dividends of $62,125.
1. Prepare a complete statement of cash flows; report its operating activities using the indirect method.
Disclose any noncash investing and financing activities in a note.
2. Analyze and discuss the statement of cash flows prepared in part 1, giving special attention to the
wisdom of the cash dividend payment.
Check Cash from operating
BTN 16-1 Refer to Krispy Kreme's financial statements in Appendix A to answer the
1. Is Krispy Kreme's statement of cash flows prepared under the direct method or the indirect method?
2. For each fiscal year 2003, 2002, and 2001, is the amount of cash provided by operating activities
more or less than the cash paid for dividends?
3. What is the largest amount in reconciling the difference between net income and cash flow from
operating activities in 2003? In 2002? In 2001?
4. Identify the largest cash flows for investing and for financing activities in 2003 and in 2002.
Obtain Krispy Kreme's financial statements for a fiscal year ending after February 2, 2003, from
either its Website (KrispyKreme.com) or the SEC's EDGAR database (WWW.SEC.gov). Since
February 2, 2003, what are Krispy Kreme's largest cash outflows and cash inflows in the investing
and in the financing sections of its statement of cash flow?
Cash provided (used) by operating activities 80000 70000 (34000)
Cash provided (used) by investing activities
Proceeds from sale of operating assets 36000
Purchase of operating assets (38000) (35000)
Cash provided (used) by financing activities
Proceeds from issuance of debt 33000
Repayment of debt (7000)
Net increase (decrease) in cash 35000 35000 35000
Average total assets 800000 650000 400000