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Indirect Method of Reporting Operating Cash Flows

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The following account balances are for the noncash current assets and current liabilities of Wynn Bicycle Company for 2008 and 2009.

December 31
2008 2009
Accounts receivable $4,000 $6,000
Inventory 30,000 20,000
Office supplies 5,000 8,000
Accounts payable 10,000 7,000
Salaries and wages payable 2,500 4,000
Interest payable 1,500 2,500
Income taxes payable 5,500 2,500

In addition, the income statement for 2009 is as follows:

Sales revenue $110,000
Costs of goods sold 85,000
Gross profit $25,000
General and administrative expense $9,000
Depreciate expense 2,000
Total operating expenses $11,000
Income before interest and taxes $14,000
Interest expense 2,000
Income before tax $12,000
Income tax expense 4,800
Net income $7,200

Required
A. Prepare the Operating Activities section of the statement of cash flows using the indirect method.
B. What does the use of the direct method reveal about a company that the indirect method does not?

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Solution Summary

The solution explains how to prepare a statement of cash flows using indirect method (operating activities only) and the differences between direct and indirect methods

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Report Cash Flows From Operating Activites - Indirect Method

See attached file for proper format.

16-4A - Gallery Corp., a merchandiser, recently compiled its 2011 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,
(5) Other Expenses are all cash expenses, and
(6) any change in Income Taxes Payable reflects the accrual and cash payment of taxes. The company's balance sheets and income statement follow.

GALLEY CORPORATION
Comparative Balance Sheets
December 31, 2011 and 2010

2011 2010
Assets
Cash................................................................... $ 174,000 $117,000
Accounts receivable................................................ 93,000 81,000
Merchandise inventory............................................. 609,000 534,000
Equipment............................................................ 333,000 297,000
Accum depreciation - Equipment.................................. (156,000) (102,000)
Total assets........................................................... $1,053,000 $927,000

Liabilities
Accounts payable.....................................................$69,000 $96,000
Income tax payable...................................................27,000 24,000
Common stock $2 par value........................................582,000 558,000
Paid-in capital in excess of par value common stock.......... 198,000 162,000
Retained earnings....................................................177,000 87,000
Total liabilities and equity.......................................$1,053,000 $927,000

GALLEY CORPORATION
Income Statement
For Year Ended December 31, 2011

Sales..........................................................................................$1,992,000
Cost of goods sold.......................................................................... 1,194,000
Gross profit................................................................................. 798,000
Operating expenses
Depreciation expense.................$54,000
Other expenses........................501,000 555,000
Income before taxes.............................................................243,000
Income taxes expense.....................................................................42,000
Net income..................................................................................... $201,000

Additional Information on Year 2011 Transactions

a. Purchased equipment for $36,000 cash.
b. Issued 12,000 shares of common stock for $5 cash per share.
c. Declared and paid $111,000 in cash dividends.

Required

Prepare a complete statement of cash flows; report its cash inflows and cash outflows from operating activities according to the indirect method.

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