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Direct Method
A friend of yours was looking at a schedule for the calculation of cash generated from operating activities prepared under the direct method and asked why
Indirect Method
A friend of yours was reading a statement of cash flows prepared under the indirect method and saw that depreciation expense was added when computing cash from operating activities. She is curious why depreciation is considered a source of cash. Write a brief memo that explains why depreciation expense is added to net income on the statement of cash flows and why it certainly is not a source of cash.
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College Accounting, Chapters 1-27
- Preparing a Statement of Cash Flows-Direct Method The controller of Newstrom Software Inc. provides the following information as the basis for a statement of cash flows: Required: 1. Calculate the net cash provided (used) by operating activities. 2. Calculate the net cash provided (used) by investing activities. 3. Calculate the net cash provided (used) by financing activities.arrow_forwardUsing the following information, complete an indirect method SCF in good form. The SCF should be presented in the worksheet labeled "Statement of Cash Flows". Record the journal entry for the sale of equipment to determine the cash effect of this transaction If ending cash on the SCF doesn't equal ending cash per the Balance Sheet, you've made a mistake somewhere. To find the error, recheck your work once, then redo the problem if you can't find your error. Use T accounts to analyze Investing Section (LT Assets) and Financing Section (LT Liabilities & Equity) for SCF ------------ Martinez Inc Balance Sheet and Income Statement Data 12/31/2025 12/31/2024 Current Assets: Cash $ 5,900 $ 6,900 Accounts Receivable 61,400 51,200 Inventory 45,200 63,800 Total Current Assets 112,500 121,900 PPE 152,700 130,200 Accumulated Depreciation (35,400) (25,000) Land 80,400 67,900 Total Assets $ 310,200 $ 295,000 Current Liabilities: Accounts Payable $…arrow_forwardThis is an accounting question about reconciling direct-method cash flow from operations to net income. I have read that generally for a simple noninventory situation the approach would be something like: Net Income Plus depreciation Minus Change in Current Assets Plus Change in Current Liabilities --> Should equal cash flows from operations in the cash flow statement. My question is about purchasing a long-term asset on account. A journal entry is made: credit accounts payable/debit long-term asset. If I generate a cash flow statement, the increase in current liabilities caused by that entry will be a part of the equation above. But that amount is not an operating cash flow, it is an investing cash flow. So my reconciliation to operating activities will be off by that amount. It seems like there's a missing adjustment in the equation, like "Minus assets purchased on account" or something like that. Example: Say my company just started and so far only has $5K contibuted cash in the…arrow_forward
- Prepare the operating section of the statement of cash flows Thank you for your help the photos has the information and the format they need to do the questionarrow_forwardHelp Save & Exit Which of the following items do we report in the statement of cash flows using the direct method? Multiple Choice 39 19 Depreciation expense. Cash paid to suppliers. Gain on sale of an asset. Loss on sale of an asset. C raw hparrow_forwardI know in order to find the cash flow from operating activities using the indirect method you start with the net income then add your depreciation expense and your loss on disposal equipment. Then you subtract increases in account receivable and decrease in account receivable and that gives you your net income. However, when I compute this it says all my answers are incorrect. I thought I was doing this correctly but clearly I need assistance.arrow_forward
- How do ledger and journal entries interact with one another? Explain how the ledger provides the information needed to prepare the balance sheet. Distinguish between a temporary and a permanent account. Explain how the ledger provides the information needed to prepare the operating statement. What is the main purpose of the statement of cash flows? What are the three categories used within the statement of cash flows? Why are these categories important for understanding an organization's cash situation? Differentiate between the direct and the indirect methods for preparing and presenting the statement of cash flows. Explain why health care organizations need both an operating statement and a cash flow statement.arrow_forwardWhich of the following is an example of a cash outflow from an investing activity? Multiple Choice Payment of cash for inventory. Payment of cash for the purchase of land. Payment of cash for treasury stock. Payment on a long-term note payablearrow_forwardCash receipts from royalties, fees, commissions, and other revenues are classified on the statement of cash flows as Cash inflows from operating activities O Cash inflows from investing activities Cash outflows for financing activities O Cash outflows for investing activitiesarrow_forward
- Why are financial statement users interested in the statement of cash flows? O It provides information about an important company resource. It is the first statement that is presented to users. It is the easiest financial statement to evaluate. It helps users decide whether assets such as office equipment should be replaced.arrow_forwardPlease give me an information about : cash reciepts, capital investments, loans, interest payment, pre-operating and admin costarrow_forwardusing the indirect method, prepare a statement of cash flows. Can you spell out the calculation around the equipment when solving the problem?arrow_forward
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