Question

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

Sales					$352,820
Cost of goods sold					200,340
Gross profit					$152,480
Operating expenses:
	Depreciation expense		$27,070
	Other operating expenses		71,580
		Total operating expenses			98,650
Income before income tax					$53,830
Income tax expense					14,930
Net income					$38,900

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

	Increase/ Decrease
Accounts receivable (net)	$(7,820)
Inventories	2,720
Prepaid expenses	(2,610)
Accounts payable (merchandise creditors)	(5,560)
Accrued expenses payable (operating expenses)	780
Income tax payable	(1,870)

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.

Booker T Industries Inc.
Cash Flows from Operating Activities Section
For the year ended on June 30
Cash flows from operating activities:
Net income	$
Net cash flow from operating activities		$

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 , 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 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.

Answer 1

Answer to Qa.

Booker T Industries Inc.
Cash Flows from Operating Activities Section
For the year ended on June 30
Particulars	Amount	Amount
Cash flows from operating activities:
Accounts receivable (net)	7820
Inventories	-2720
Prepaid expenses	2610
Accounts payable (merchandise creditors)	-5560
Accrued expenses payable (operating expenses)	780
Income tax payable	-1870	1060
Net income		38900
Net cash flow from operating activities		39960

Answer to Qb.

Indirect method considers items falling in Profit and Loss account instead of Adjusted net profit, Direct method shows calculation from profit reducing the non cash items and effects of Balance sheet changes.