Direct and Indirect Methods

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Rebecca McLaughlin
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1 Part 1 Questions: Practice Simple Direct Cash Flow Question 1: Use the following information to complete a direct method cash flow statement: Cash Flows from Operating Activities Cash receipts Received from sales of goods 900 Paid for inventory 300 Paid for employees 100 Paid for interest 50 Paid for taxes 50 Paid for other expenses 300 Cash paid for equipment 50 Cash received for equipment 10 Cash received for common stock 100 Dividends 10 Cash received from note payable 30 Question 2: What is the operational cash flow? Question 3: What is the investing cash flow? Question 4: What is the financing cash flow? 1

2 Part 1 Answers Answer 1: A completed direct statement of cash flows should look like the following: ABC Company Statement of Cash Flows Period Year: Ended 12/31/20XX Cash flows from operating activities Cash received from customers 900 Cash received from noncustomers - Cash paid for inventory (300) Cash paid for employees (100) Cash paid for interest (50) Cash paid for taxes (50) Cash paid for other expenses (300) Net cash provided by operating activities 100 Cash flows from investing Cash paid for equipment (50) Cash received from equipment 10 Net cash provided by investing activities (40) Cash flows from financing Cash received from issuing stock 100 Cash paid to reduce notes Cash received from increasing note 30 Cash paid to dividends (10) Net cash flows from financing 120 Net increase (decrease) in cash 180 Cash balance at previous year's end 100 Cash balance at current year's end 280 Answer 2: The correct answer is $100. It comes from the line "Net cash provided by operating activities" from your direct statement of cash flows. Answer 3: The correct answer is negative $40. It comes from the line "Net cash provided by investing activities" from your direct statement of cash flows. 2

3 Answer 4: The correct answer is $120. It comes from the line "Net cash flows from financing" from your direct statement of cash flows. 3

4 Part 2 Questions: Practice Simple Indirect Cash Flow Question 5: Use the following information to complete an indirect method cash flow statement: Net income after taxes 58 Loss on sale of equipment Deferred taxes 20 Gain on long-term debt Depreciation 100 Increase in accounts receivable balance (100) Increase in inventory balance (100) Increase in prepaid balance - Increase in accounts payable balance 50 Increase in income taxes payable balance - Cash paid for equipment ( 50) Cash received for equipment 10 Cash received for common stock 100 Cash paid for dividends (10) Cash received from notes payable 30 Question 6: What is the operational cash flow? Question 7: What is the investing cash flow? Question 8: What is the financing cash flow? 4

5 Part 2 Answers Answer 5: A completed indirect statement of cash flows should look like the following: DEF Company Statement of Cash Flows Period year: Ended 12/31/20XX Cash flows from operating activities 20XX Net income after taxes 58 Adjustments to reconcile net income to net Loss on sale of equipment Deferred taxes 20 Gain on long-term debt Depreciation 100 Net adjustments to reconcile net income to net Increase in accounts receivable balance (100) Increase in inventory balance (100) Increase in prepaid balance - Increase in accounts payable balance 50 Increase in income taxes payable balance - Net cash provided by operating activities $50 Cash flows from investing activities Cash paid for equipment (50) Cash received for equipment 10 Net cash from investing activities ($40) Cash flows from financing activities Cash received for common stock 100 Cash paid for dividends (10) Cash received from notes payable 30 Net cash from financing activities 130 Net cash 140 Beginning cash position balance 100 Ending cash position balance 240 5

6 Answer 6: The correct answer is $50. It comes from the line "Net cash provided by operating activities" from your indirect statement of cash flows. Answer 7: The correct answer is negative $40. It comes from the line "Net cash from investing activities" from your indirect statement of cash flows. Answer 8: The correct answer is $130. It comes from the line "Net cash from financing activities" from your indirect statement of cash flows. 6

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