Question

Presented below is the income statement of Cowan, Inc.: Sales revenue $380,000 Cost of goods sold 225,000 Gross profit $155,000 Operating expenses 95,000 Income before income taxes 60,000 Income taxes 24,000 Net income $36,000 In addition, the following information related to net changes in working capital is presented: Debit Credit Cash $12,000 Accounts receivable 25,000 Inventories $19,400 Salaries payable (operating expenses) 8,000 Accounts payable 14,000 Income taxes payable 3,000 The company also indicates that depreciation expense for the year was $16,700 and that the deferred tax liability account increased $2,600. Instructions Prepare a schedule computing the net cash flow from operating activities that would be shown on a statement of cash flows: (a) using the indirect method. (b) using the direct method.

Answer 1

NET CASH FLOW FROM OPERATING ACTIVITY INDIRECT METHOD

Cowan Inc.

Statement of cash flow (partial)

Indirect Method

Cash Flows from Operating Activities:

NET INCOME $36,000

Adjustment of non cash expenditure:

Depreciation $16,700

Operating profit before working capital changes $52,0700

ADJUSTMENTS FOR WORKING CAPITAL CHANGES:

INCREASE IN ACCOUNT RECEIVABLE ($25,000)

DECREASE IN INVENTORY $19,400

INCREASE IN ACCOUNT PAYABLE $14,000

DECREASE IN SALARY PAYABLE ($8,000)

DECREASE IN INCOME TAX PAYABLE ($3,000)

INCREASE IN DEFERRED TAX LIABILITY $2,600

NET CASH FROM OPERATING ACTIVITY $52,700