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Indirect Method of Reporting Operating Cash Flows

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

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