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cash flow from operations mdash comparison of indirect and direct methods the statem 693036

Cash Flow from Operations—Comparison of Indirect and Direct Methods

The statement of cash flows for Riker Company (prepared using the indirect method) follows.

Consider the following additional information:

(a) Sales for the year totaled $812,350. Cost of goods sold was $500,000. Operating expenses were $100,000. Interest expense was $23,000. Income tax expense was $40,430.

(b) Of the decrease in accounts payable, 80% is related to inventory purchases; the remaining

20% related to operating expenses.

(c) Depreciation and amortization are period costs; they do not enter into the computation of cost of goods sold.

Riker Company
Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2008

Cash flows from operating activities:

Net income

 

$68,850

Adjustments:

 

 

Depreciation expense              

$65,000

 

Amortization expense             

10,000

 

Loss on sale of machine            

7,400

 

Gain on retirement of long term debt  

(2,330)

 

Increase in accounts receivable       

(8,600)

 

Decrease in inventory             

12,430

 

Decrease in prepaid operating expenses

1,680

 

Decrease in accounts payable        

(2,400)

 

Increase in interest payable          

500

 

Increase in income taxes payable      

2,500

86,180

Net cash provided by operating activities

 

$155,030

Cash flows from investing activities:

 

 

Sale of machine                  

$12,000

 

Purchase of fixed assets            

(78,000)

 

Net cash used in investing activities    

 

(66,000)

Cash flows from financing activities:

 

 

Retirement of long term debt        

($65,000)

 

Payment of dividends              

(27,000)

 

Net cash used in financing activities    

 

(92,000)

Net decrease in cash                 

 

($2,970)

Cash at beginning of year              

 

5,320

Cash at end of year                  

 

$2,350

Instructions: Prepare the Operating Activities section of the statement of cash flows for Riker Company using the direct method.

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