1) If salaries payable was $75,000 at the beginning of the year and $40,000 at t
ID: 2375737 • Letter: 1
Question
1) If salaries payable was $75,000 at the beginning of the year and $40,000 at the end of the year, should $35,000 be added to or deducted from income to determine the amount of cash flows from operating activities by the indirect method? Explain.
2) A long-term investment in bonds with a cost of $800,000 was sold for $910,000 cash. (a) What was the gain or loss on the sale? (b) What was the effect of the transaction on cash flows? (c) How should the transaction be reported in the statement of cash flows if cash flows from operating activities are reported by the indirect method?
3) For the current year, Bearings Company decided to switch from the indirect method to the direct method for reporting cash flows from operating activities on the statement of cash flows. Will the change cause the amount of net cash flow from operating activities to be (a) larger, (b) smaller, or (c) the same as if the indirect method had been used? Explain.
4) Name five common major classes of operating cash receipts or operating cash payments presented on the statement of cash flows when the cash flows from operating activities are reported by the direct method.
Explanation / Answer
1) IT SHOULD BE DEDUCTED
AS AMOUNT OF 35000 IS PAID OUT OF INCOME
2) GAIN = 110000
CASH INFLOW OF 110000
IN CASH FLOW FROM OPERATING ACTIVITIES
SALE OF INVESTMENT = 110000
3) (c) the same as if the indirect method had been used
AS THE AMOUNT WILL REMAIN SAME, JUST THE METHOD DIFFERS
4) 5 HEADS ARE
CASH INFLOW
From sales of goods or services.
From returns on loans (interest) and on equity securities (dividends).
Cash outflows
To suppliers for inventory.
To government for taxes.
To lenders for interest.
To others for expenses
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