Presentation on theme: "7Apx--1 College Accounting Heintz & Parry 20 th Edition."— Presentation transcript:
7Apx--1 College Accounting Heintz & Parry 20 th Edition
Chapter 23 Appendix: Statement Of Cash Flows: The Direct Method
1 Describe the direct method of reporting cash flows from operating activities.
THE DIRECT METHOD Under the direct method, revenues and expenses reported on the income statement are adjusted to reflect the cash received or paid for each item The investing and financing activities sections of the statement of cash flows are the same under both the direct and the indirect methods
2 Prepare a schedule for the calculation of cash generated from operating activities under the direct method by adjusting revenues and expenses for changes in current assets and current liabilities associated with operations.
STATEMENT OF CASH FLOWS EXAMPLE: Simplex Company has prepared its income statement and statement of retained earnings for the year ended December 31, 20- 2 and the balance sheets for December 31, 20- 1 and 20-2. Now it needs to prepare its statement of cash flows.
3 Prepare a schedule for the calculation of cash generated from operating activities under the direct method, including necessary adjustments when the company reports the following: a.Changes in current assets and current liabilities associated with operations. b.Depreciation expense. c.Gains or losses on the sale of long-term assets. d.Receivables and payables associated with interest revenue, interest expense, and tax expense.
CASH AND CASH EQUIVALENTS To qualify as a cash equivalent: –An investment must be readily convertible to a known amount of cash These are considered the same as cash when preparing the statement of cash flows 20-1 Cash Government Notes $20,000 3,200 $23,200 20-2 $17,980 1,800 $19,780 $3,420 decrease
OPERATING EXPENSES Multiplex informs us that depreciation expense of $10,400 is included in the operating expenses reported on the income statement. Depreciation does not use or provide cash, therefore it should be subtracted from operating expenses on our schedule.