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# Indirect and Direct Method: Calculate Cash Flows

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1. The 2007 accounting records of Verlander Transport reveal these transactions and events.

Payment of interest \$ 10,000 Collection of accounts receivable \$182,000
Cash sales 48,000 Payment of salaries and wages 53,000
Receipt of dividend revenue 18,000 Depreciation expense 16,000
Payment of income taxes 12,000 Proceeds from sale of vehicles 812,000
Net income 38,000 Purchase of equipment for cash 22,000
Payment of accounts payable Loss on sale of vehicles 3,000
for merchandise 115,000 Payment of dividends 14,000
Payment for land 74,000 Payment of operating expenses 28,000

Prepare the cash flows from operating activities section using the direct method. (Not all

2. The comparative balance sheets for Ramirez Company as of December 31 are presented below.

Comparative Balance Sheets
December 31
Assets 2007 2006
Cash \$ 71,000 \$ 45,000
Accounts receivable 44,000 62,000
Inventory 151,450 142,000
Prepaid expenses 15,280 21,000
Land 105,000 130,000
Equipment 228,000 155,000
Accumulated depreciation?equipment (45,000) (35,000)
Building 200,000 200,000
Accumulated depreciation?building (60,000) (40,000)
Total \$709,730 \$680,000
Liabilities and Stockholders' Equity
Accounts payable \$ 47,730 \$ 40,000
Bonds payable 260,000 300,000
Common stock, \$1 par 200,000 160,000
Retained earnings 202,000 180,000
Total \$709,730 \$680,000

1. Operating expenses include depreciation expense of \$42,000 and charges from prepaid
expenses of \$5,720.
2. Land was sold for cash at book value.
3. Cash dividends of \$15,000 were paid.
4. Net income for 2007 was \$37,000.
5. Equipment was purchased for \$95,000 cash. In addition, equipment costing \$22,000
with a book value of \$10,000 was sold for \$6,000 cash.
6. Bonds were converted at face value by issuing 40,000 shares of \$1 par value common
stock.

Prepare a statement of cash flows for the year ended December 31, 2007, using the indirect method.
Cash from operations is \$105,000

#### Solution Summary

This tutorial provides guidelines on preparing the cash flows of operating activities using indirect and direct methods.

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## What information does a cash flow statement provide?

What information does a cash flow statement provide? Using an example, explain the direct and indirect methods for calculating cash flows from operating activities.

With references.

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