Adjustments to Income via the Indirect Method: Operating Activites LO1, 2, 3 The
ID: 2490566 • Letter: A
Question
Adjustments to Income via the Indirect Method: Operating Activites LO1, 2, 3
The following account balances are for the noncash current assets and current liabilities of Wynn Bicycle Company at the end of 2011 and 2012.
December 31
2011
2012
Accounts receivable
$ 4,000
$ 6,000
Inventory
30,000
20,000
Office supplies
5,000
8,000
Accounts payable
10,000
7,000
Salaries and wages payable
2,500
4,000
Interest payable
1,500
2,500
Income taxes payable
5,500
2,500
In addition, the income statement for 2012 is as follows:
Sales revenue
$110,000
Cost of goods sold
85,000
Gross profit
$ 25,000
General and administrative expense
$ 9,000
Depreciation expense
2,000
Income before interest and taxes
$ 14,000
Interest expense
2,000
Income before tax
$ 12,000
Income tax expense
4,800
Net income
$ 7,200
Required
A.Prepare the operating activities section of the statement of cash flows, using the indirect method.
B.What does the use of the direct method reveal about a company that the indirect method does not?
Explanation / Answer
1.Cash flow from operating activity:
2. Under the direct method, the cash flows from operating activities will include the amounts for lines such as cash from customers and cash paid to suppliers. In contrast, the indirect method will show net income followed by the adjustments needed to convert the total net income to the cash amount from operating activities.
The direct method must also provide a reconciliation of net income to the cash provided by operating activities. (This is done automatically under the indirect method.)
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