Problem

Reporting Operating Cash Flows by the Indirect MethodUsing the information presented in Pr...

Reporting Operating Cash Flows by the Indirect Method

Using the information presented in Problem 13.4B, prepare a partial statement of cash flows for the current year, showing the computation of net cash flows from operating activities using the indirect method. Explain why the increase in accounts receivable over the year was subtracted from net income in computing the cash flows from operating activities.

Problem 13.4B

Reporting Operating Cash Flows by the Direct Method

The following income statement and selected balance sheet account data are available for Royce Interiors, Inc., at December 31, 2015:

ROYCE INTERIORS, INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2015
Revenue:
Net sales		$2,600,000
Dividend income		55,000
Interest income		40,000
Gain on sales of marketable securities		3,000
Total revenue and gains		$2,698,000
Costs and expenses:
Cost of goods sold	$1,300,000
Operating expenses	300,000
Interest expense	60,000
Income tax expense	110,000
Total costs and expenses		$1,770,000
Net income		$ 928,000
	End of Year	Beginning of Year
Selected account balances:
Accounts receivable	$ 450,000	$ 440,000
Accrued interest receivable	7,000	3,000
Inventories	575,000	550,000
Short-term prepayments	9,000	8,000
Accounts payable (merchandise suppliers)	415,000	410,000
Accrued operating expenses payable	86,000	90,000
Accrued interest payable	10,000	8,000
Accrued income taxes payable	20,000	22,000

Additional Information

1. Dividend revenue is recognized on the cash basis. All other income statement amounts are recognized on the accrual basis.
2. Operating expenses include depreciation expense of $49,000.

Instructions

a. Prepare a partial statement of cash flows, including only the operating activities section of the statement and using the direct method. Place brackets around numbers representing cash payments. Show supporting computations for the following:
1. Cash received from customers.
2. Interest and dividends received.
3. Cash paid to suppliers and employees.
4. Interest paid.
5. Income taxes paid.
b. Management of Royce Interiors, Inc., is exploring ways to increase the cash flows from operations. One way that cash flows could be increased is through more aggressive collection of receivables. Assuming that management has already taken all the steps possible to increase revenue and reduce expenses, describe two other ways that cash flows from operations could be increased.