Question

This continues the previous Problem. The president looked at the indirect-method cash flow statement and suggested a way to help the cash flow problem. He suggested tripling the depreciation from $30,000 to $90,000 a year. That way, the cash flow will improve by $60,000 annually. Explain why this reasoning is faulty.
In Problem, Wayzata Company saw its cash plummet by $110,000 in 20X0. The company’s president wants an explanation of what caused the decrease in cash despite income of $60,000. He has asked you to prepare both direct and indirect method statements of cash flows from operations for 20X0. You have discovered the following information:
• Sales, all on credit, were $560,000.
• Accounts receivable increased by $130,000.
• Cost of goods sold was $390,000.
• Payments to suppliers were $455,000.
• Accounts payable decreased by $40,000.
• Inventory increased by $25,000.
• Operating expenses were $95,000 all paid in cash except for depreciation of $30,000.
• Income tax expense was $15,000; taxes payable decreased by $5,000.



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  • CreatedFebruary 20, 2015
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