The income statement for Hanalei International Inc. is presented here:

Hanalei's statement of financial position contained these comparative data at December 31:
2012 2011
Accounts receivable.......................................$50,000.......$60,000
Prepaid insurance.............................................5,000..........8,000
Accounts payable............................................40,000.........31,000
Unearned revenue..........................................$10,000......$14,000
Salaries payable.............................................10,000..........7,500
Interest payable...............................................1,000.........1,750
Income tax payable..........................................4,000..........3,500
Additional information:
1. Operating expenses include depreciation expense, $45,000; amortization expense, $5,000; administrative expenses, $40,000; salaries expense, $300,000; and gain on sale of equipment, $25,000.
2. Interest expense includes $500 related to the amortization of a bond discount on bonds payable.
3. Prepaid insurance, accounts payable, and unearned revenue relate to operating (administrative) expenses.
Instructions
(a) Prepare the operating activities section of the statement of cash flows, using either (1) the indirect method or (2) the direct method, as assigned by your instructor.
(b) Which method-indirect or direct-do you recommend this company use to prepare its operating activities section? Explain your reasoning.

Transcribed Image Text:

HANALEI INTERNATIONAL INC. Income Statement Year Ended December 31, 2012 Fee revenue Operating expenses Profit from operations Interest expense Profit before income tax Income tax expense Profit $565,000 365,000 200,000 10,000 190,000 47,500 $142,500