Cash Flows from Operating Activities—Direct Method
The income statement of Booker T Industries Inc. for the current year ended June 30 is as follows:
| Sales | $511,000 | ||||
| Cost of merchandise sold | 290,500 | ||||
| Gross profit | $220,500 | ||||
| Operating expenses: | |||||
| Depreciation expense | $39,200 | ||||
| Other operating expenses | 105,000 | ||||
| Total operating expenses | 144,200 | ||||
| Income before income tax | $76,300 | ||||
| Income tax expense | 21,700 | ||||
| Net income | $54,600 | ||||
Changes in the balances of selected accounts from the beginning to the end of the current year are as follows:
| Increase/ Decrease | ||
| Accounts receivable (net) | $($11,760) | |
| Inventories | 3,920 | |
| Prepaid expenses | (3,780) | |
| Accounts payable (merchandise creditors) | (7,980) | |
| Accrued expenses payable (operating expenses) | 1,260 | |
| Income tax payable | (2,660) | |
a. Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the direct method. Use the minus sign to indicate cash out flows, cash payments, decreases in cash, or any negative adjustments.
| Booker T Industries Inc. | ||
| Cash Flows from Operating Activities Section | ||
| For the year ended on June 30 | ||
| Cash flows from operating activities: | ||
| Sales | $ | |
| Collections of accounts receivable | $ | |
| Cash received from customers | ||
| Net income | ||
| Net cash flow from operating activities | $ | |
b. What does the direct method show about a company’s cash flows from operating activities that is not shown using the indirect method?
With the direct method , the cash received less the cash payments is the net cash flow from operating activities. Individual cash receipts and payments are reported in the Cash Flows from Operating Activities section.
The direct method adjusts accrual-basis net income for revenues and expenses that do not involve the receipt or payment of cash to arrive at cash flows from operating activities.
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