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Chapter 23: Q9Q (page 1372)

Differentiate between the direct method and the indirect method by discussing each method

Short Answer

Expert verified

The incomes and costs are straightforwardly balanced by the direct method to coordinate the cash basis. Altering accrual net income could be a component of the indirect approach.

Step by step solution

01

Meaning of Direct method

The direct method cash flow statement keeps track of how much money enters and leaves a business over a given period. As a result of a company's operational activity, this approach also detects changes in cash payments and receipts.

02

The difference between the direct method and the indirect method

According to the direct method, the difference between cash receipts and outlays is the net cash flow from operating operations. The revenues and expenses are directly adjusted by the direct method to match the cash basis. Net cash flow from operating operations, which is what is produced, is known as net cash income.

Adjusting accrual net income may be a component of the indirect approach. Beginning with accrual net income, non-cash things included in net income are at that point included or subtracted. Depreciation and other non-cash costs, as well as shifts within the current resource and obligation account balances from one period to another, are examples of adjustments.

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Most popular questions from this chapter

Question: Stan Conner and Mark Stein were discussing the presentation format of the statement of cash flows of Bombeck Co. At the bottom of Bombeck鈥檚 statement of cash flows was a separate section entitled 鈥淣oncash investing and financing activities.鈥� Give three examples of significant noncash transactions that would be reported in this section.

Question: (SCF鈥擠irect Method) Data for Pat Metheny Company are presented in E23-11.

Instructions

Prepare a statement of cash flows using the direct method. (Do not prepare a reconciliation schedule.)

Question: (Analysis of Improper SCF) The following statement was prepared by Maloney Corporation鈥檚 accountant.


MALONEY CORPORATION

STATEMENT OF SOURCES AND APPLICATION OF CASH

FOR THE YEAR ENDED SEPTEMBER 30, 2017

Sources of cash

Net income

\(111,000

Depreciation and depletion

70,000

Increase in long-term debt

179,000

Changes in current receivables and inventories, less current liabilities (excluding current maturities of long-term debt)

14,000

\)374,000

Application of cash

Cash dividend

\(60,000

Expenditure for property, plant, and equipment

214,000

Investments and other uses

20,000

Change in cash

80,000

\)374,000

The following additional information relating to Maloney Corporation is available for the year ended September 30, 2017.

  1. Salaries and wages expense attributable to stock option plans was \(25,000 for the year.
  2. Net expenditure:

Expenditures for property, plant, and equipment

\)250,000

Proceeds from retirements of property, plant, and equipment

36,000

Net expenditures

\(214,000

  1. A stock dividend of 10,000 shares of Maloney Corporation common stock was distributed to common stockholders on April 1, 2017, when the per share market price was \)7 and par value was \(1.
  2. On July 1, 2017, when its market price was \)6 per share, 16,000 shares of Maloney Corporation common stock were issued in exchange for 4,000 shares of preferred stock.
  3. Depreciation expenses:

Depreciation expenses

\(65,000

Depletion expenses

5,000

\)70,000

  1. Net increase:

Increase in long-term debt

\(620,000

Less: Redemption of debt

441,000

Net increases

\)179,000

Instructions

(a) In general, what are the objectives of a statement of the type shown above for Maloney Corporation? Explain.

(b) Identify the weaknesses in the form and format of Maloney Corporation鈥檚 statement of cash flows without reference to the additional information. (Assume adoption of the indirect method.)

(c) For each of the six items of additional information for the statement of cash flows, indicate the preferable treatment and explain why the suggested treatment is preferable.

In 2017, Elbert Corporation had net cash provided by operating activities of \(531,000, net cash used by investing activities of \)963,000, and net cash provided by financing activities of \(585,000. At January 1, 2017, the cash balance was \)333,000. Compute December 31, 2017, cash

Question: What are some of the arguments in favor of using the indirect (reconciliation) method as opposed to the direct method for reporting a statement of cash flows?
See all solutions

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