The direct versus the indirect method to determine cash flows from operating activities
The following accounts and corresponding balances were drawn from Bryan Sports, Inc.’s 2012 and 2011 year-end balance sheets:
Account Title | 2012 | 2011 |
Accounts receivable | $36,000 | $45,000 |
Merchandise inventory | 65,000 | 62,000 |
Prepaid insurance | 24,000 | 20,000 |
Accounts payable | 20,000 | 25,000 |
Salaries payable | 4,500 | 3,900 |
Unearned service revenue | 9,500 | 8,600 |
The 2012 income statement is shown below:
Income Statement | |
Sales | $651,500 |
Cost of goods sold | (402,000) |
Gross margin | 249,500 |
Service revenue | 15,000 |
Insurance expense | (38,000) |
Salaries expense | (175,000) |
Depreciation expense | (8,000) |
Operating income | 43,500 |
Gain on sale of equipment | 2,500 |
Net income | $ 46,000 |
Required
a. Prepare the operating activities section of the statement of cash flows using the direct method.
b. Prepare the operating activities section of the statement of cash flows using the indirect method.
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