The direct versus the indirect method of determining cash flows from operating activities.

The following information applies to the questions displayed below. Green Brands, Inc. (GBI) presents its statement of cash flows using the indirect method. The following accounts and corresponding balances were drawn from GBI's Year 2 and Year 1 year-end balance sheets:

Account Title                                  Year 2                 Year 1

Accounts receivable                    $48,0000             $52,000

Merchandise inventory               78,000                  72,000

Prepaid insurance                        24,000                   25,800

Accounts payable                         26,300                   17,400

Salaries payable                            4,900                     3,850

Unearned service revenue          800                         3,000

 

Required 

a. Prepare the operating activities section of the statement of cash flows using the direct method for year 2.

b. Prepare the operating activities section of the statement of cash flows using the indirect method for year 2.

The Year 2 income statement is shown next: Income Statement Sales Cost of goods sold Gross margin Service revenue Insurance expense Salaries expense Depreciation expense Operating income Gain on sale of equipment $ 611,000 (379,000) 232,000 6,000 (39,000) (155,000) (5,600) 38,400 4, 000 %24 Net income $ 42,400