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This post addresses the direct and indirect methods.

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What did you find to be the most challenging part of the problem? Explain why.

The income statement for Kosinski Manufacturing Company contains the following condensed information.

Income Statement For the Year Ended December 31, 2007
Revenues $6,583,000
Operating expenses, excluding depreciation $4,920,000
Depreciation expense 880,000 5,800,000
Income before income taxes 783,000
Income tax expense 353,000
Net income $ 430,000

Included in operating expenses is a $24,000 loss resulting from the sale of machinery for $270,000 cash. Machinery was purchased at a cost of $750,000. The following balances are reported on Kosinski's comparative balance sheet at December 31.
2007 2006
Cash $672,000 $130,000
Accounts receivable 775,000 610,000
Inventories 834,000 867,000
Accounts payable 521,000 501,000

Income tax expense of $353,000 represents the amount paid in 2007. Dividends declared and paid in 2007 totaled $200,000.

What are the most challenging parts about creating cash flow statements using the indirect/direct methods? Explain why.

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Solution Summary

The solution examines the Kosinski Manufacturing Company statement of cash flows for the direct and indirect methods regarding the parts of the statement preparation that were the most challenging to accomplish.

Solution Preview

The most challenging part of this problem was to identify the differences between the direct and indirect methods, because the differences are the main factors that affect the presentation of each statement of cash flows, under the respective method. Whereas the indirect method shows the changes in the accounts that have taken ...

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