There are two methods for reporting operating activities on the Statement of Cas
ID: 2492473 • Letter: T
Question
There are two methods for reporting operating activities on the Statement of Cash Flows, the direct method and the indirect method. Examples of the two methods are shown. Selected information from Rowe Publishing Company's Income Statement and Balance Sheets are provided as support to the following Statements of Cash Flows.
Selected information from Rowe Publishing Company's Income Statement
Selected information from Rowe Publishing Company's Balance Sheets
Direct method:
Indirect method:
Notice that the only difference between the two methods is in the - Select your answer -operatinginvestingfinancingCorrect 1 of Item 2 activities section. The direct method adjusts each item on the income statement from the accrual basis to the cash basis and the indirect method starts with net income and adjusts for non-cash items such as depreciation expense and for increases and decreases in the balances in current assets.
The balance sheets for Byron Manufacturing at December 31, 2013 and 2014 are shown:
Additional Information needed to prepare the Statement of Cash Flows using the indirect method:
Net income was $2,520
Byron paid $25,580 in cash dividends
Byron issued $49,830 in bonds payable for cash
Byron retired $93,830 in bonds payable with cash
No property, plant and equipment assets were sold or disposed of during the period
Prepare the Statement of Cash Flows using the indirect method.
Rowe Publishing CompanyStatement of Cash Flows
For the Year Ended December 31, 2014 Cash flow operating activities: Cash collected from customer $ 1,042,000 Cash paid to suppliers (586,000) Cash payments to employees (347,000) Cash payments for interest (16,000) Cash payments for income taxes (29,000) Net cash provided by operating activities $ 64,000 Cash flows from investing activities: Equipment purchase $ (25,000) Net cash used for investing activities (25,000) Cash flows from investing activities: Repayment of notes payable $ (35,000) Proceeds from issuance of bonds payable 50,000 Payment of dividends (35,000) Net cash used for financing activities (20,000) Net increase (decrease) in cash $ 19,000 Cash, December 31, 2013 66,000 Cash, December 31, 2014 $ 85,000
Explanation / Answer
Byron Manufacturing Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities: Net income $ 2520 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation expense $ 29350 - Increase in accounts receivable (1,770) - Increase in inventory (1070) - Increase in accounts payable 19,100 - Decrease in salaries payable (2240) - Select your answer -IncreaseDecreaseCorrect 9 of Item 3 in income taxes payable (9,020) 34,350 Net cash provided by operating activities $ 36,870 Cash flows from investing activities: Purchase of equipment $ (6,200) Net cash used for investing activities (6,200) Cash flows from financing activities: Issued bonds payable $49830 Retired bonds payable (93,830) Issued common stock 35000 Paid cash dividends (25,580) Net cash used for financing activities (34,580) Net increase (decrease) in cash ($3910) Cash, December 31, 2013 $9410 Cash, December 31, 2014 $ 5500