Cash Flows from Operating Activities—Direct Method The income statement of Booke

Question

Cash Flows from Operating Activities—Direct Method

The income statement of Booker T Industries Inc. for the current year ended June 30 is as follows:

Changes in the balances of selected accounts from the beginning to the end of the current year are as follows:

a. Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the direct method. Use the minus sign to indicate cash out flows, cash payments, decreases in cash, or any negative adjustments.

b. What does the direct method show about a company’s cash flows from operating activities that is not shown using the indirect method?

With the direct method , the cash received less the cash payments is the net cash flow from operating activities. Individual cash receipts and payments are reported in the Cash Flows from Operating Activities section.

The direct method adjusts accrual-basis net income for revenues and expenses that do not involve the receipt or payment of cash to arrive at cash flows from operating activities.

Sales $511,000 Cost of merchandise sold 290,500 Gross profit $220,500 Operating expenses: Depreciation expense $39,200 Other operating expenses 105,000 Total operating expenses 144,200 Income before income tax $76,300 Income tax expense 21,700 Net income $54,600

Explanation / Answer

ReqA: BOOKER T INDUSTRIES INC CASHFLOWS FROM OPERATING ACTIVITIES FOR THE YEAR ENDED JUNE 30 Cash flows from operating activities Sales 511,000 Add: Changes in Account receivable 11760 Collections from accounts receivable 522760 Cost of merchandise Sold 290500 Less: Increase in inventory 3920 Merchandise purchased 294420 Add: Changes in Accounts payable 7980 Payment to Accounts payable -302400 Operating expense incurred 105000 Less: Decrease in Prepaid expense 3780 Less: Changes in Accrued expense 1260 -99960 Taxes Expense 21700 Add: Changes in tax payable 2660 -24360 Cash inflows from Operating Activities 96040 ReqB: With the direct method, the cash received less the cash payments is the net cash flow from operating activities. Individual cash receipts and apyment are reported in the cash flows from operating activities section.'

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