As discussed in the chapter, there are two methods for presenting the information in the operating activities section of the statement of cash flows: the direct method and the indirect method. Accounting standards generally express a preference for the direct method but also allow the indirect method. The vast majority of companies prepare their statements of cash flows using the indirect method of presentation.
Presented below are two statements of cash flows for Kralovec Company. In the first one, the operating activities section is presented using the direct method; in the second statement, the indirect method is used.
KRALOVEC COMPANY
Statement of Cash Flows
For the year ended December 31, 2011
(1) Direct Method

(2) Indirect Method
Question Continue In Next Page.

Required:
a. As discussed in Chapter 1, understandability is an important qualitative characteristic of financial statements. With this in mind, compare the two statements above and comment on the understandability of the direct versus the indirect method of presen¬tation in the operating activities section. Which approach do you think most users of financial statements would prefer?
b. Looking only at the first statement (presented using the direct method), analyze the cash flow data for Kralovec Company and note any significant points that can be observed from it, regarding the company's operations during the year. Then repeat this process, looking only at the second statement (presented using the indirect method).
c. Based on your experience in working through part "b," which method of presentation do you find more useful for analyzing the cash flow data, understanding the company's operations, and identifying points to be investigated further?

Cash flows from operating activities Cash collections from customers Cash payments for operating expenses Cash payments for interest Cash payments for income taxes $ 6,446,000 (4,883,000) (80,000) (313.000) 1,170,000 Net cash provided by operating activities Cash flows from investing activities Sale of machinery Purchase of machinery S 140,000 (750,000) Net cash used by investing activities (610,000) Cash flows from financing activities Retirement of bonds Payment of dividends (100,000) (200,000) Net cash used by financing activities (300,000) Net increase in cash during year Cash at beginning of year Cash at end of year 260,000 130,000 390,000 Cash flows from operating activities $ 705000 Net earnings Adjustments to convert net earnings to net cash provided by operating activities Depreciation expense Loss on sale of machinery Increase in accounts receivable Decrease in inventories Increase in accounts payable Decrease in interest payable Increase in taxes payable $ 470,000 34.000 (100,000) 35,000 21,000 (5,000) 10,000 465,000 1,170,000 Net cash provided by operating activities Cash flows from investing activities Sale of machinery Purchase of machinery 140,000 750,000) Net cash used by investing activities (610,000) Cash flows from finaneing activities Retirement of bonds Payment of dividends (100,000) (200,000) Net cash used by financing activities (300,000) Net increase in cash during year 260,000 130,000 390,000 Cash at beginning of year Cash at end of year