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Chapter 14: Q14-15RQ (page 769)

Question: How does the direct method differ from the indirect method when preparing the operating activities section of the statement of cash flows?

Short Answer

Expert verified

Answer

The direct method is like astatement of profit and loss whereas, the indirect method uses balance sheet items to get results.

Step by step solution

01

Direct method

Under the direct method, each item of the statement of profit and loss is picked up and converted into cash basis from an accrual basis. In short, we can say that the direct method of operating activity is thecash income statement.

02

Indirect method

Indirect method starts with net income then each item if picked from current assets and current liabilities to make adjustments to the net income. The very first step of indirect method is to add depreciation, depletion, and amortization expense in the net income.

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Most popular questions from this chapter

Using a spreadsheet to prepare the statement of cash flows— indirect method The 2018 comparative balance sheet and income statement of Attleboro Group, Inc. follow. Attleboro disposed of a plant asset at book value in 2018.

Prepare the spreadsheet for the 2018 statement of cash flows. Format cash flows from operating activities by the indirect method. A plant asset was disposed of for \(0. The cost and accumulated depreciation of the disposed asset was \)13,600. There were no sales of land, no retirement of common stock, and no treasury stock transactions. Assume plant asset and land acquisitions were for cash.

Question: What should the net change in cash section of the statement of cash flows always reconcile with?

Jennifer’s Wedding Shops earned net income of \(27,000, which included depreciation of \)16,000. Jennifer’s acquired a \(119,000 building by borrowing \)119,000 on a long-term note payable.

Requirements

  1. How much did Jennifer’s cash balance increase or decrease during the year?
  2. Were there any non-cash transactions for the company? If so, show how

they would be reported in the statement of cash flows.

Preparing the direct method statement of cash flows Use the data in Short Exercise S14A-12 and your results. Prepare the business’s complete statement of cash flows for the year ended June 30, 2018, using the direct method for operating activities.

Preparing the direct method statement of cash flows Red Toy Company reported the following comparative balance sheet:

Requirements

1. Compute the collections from customers during 2018 for Red Toy Company. Sales Revenue totaled \(134,000.

2. Compute the payments for inventory during 2018. Cost of Goods Sold was \)79,000.
See all solutions

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