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Operating Activities: Direct vs. Indirect Method

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The account balances for the noncash current assets of Allen Company are as follows:
Allen Company
31-Dec
2011 2012
Accounts receivable $45,000 $38,000
Inventory 40,000 50,000
Prepaid insurance 21,000 17,000
Total current assets $106,000 $105,000

Net income for 2012 is $35,000. Depreciation expense is $22,000. Assume that all sales and all purchases are on account.

Required:
A. Prepare the operating activities section of the statement of cash flows, using the indirect method. Explain why cash flow from operating activities is more or less than the net income for the period shown.
B. What additional information do you need to prepare the operating activities section of the statement of cash flows, using the direct method?
C. Explain the usefulness of each method for managerial decision making.

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Solution Summary

Solution helps in preparing the operating activities section of the statement of cash flows, using the indirect method

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