This continues the previous Problem. The president looked at the indirect-method cash flow statement and suggested a

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.

Accounts Payable
Accounts payable (AP) are bills to be paid as part of the normal course of business.This is a standard accounting term, one of the most common liabilities, which normally appears in the balance sheet listing of liabilities. Businesses receive... Accounts Receivable
Accounts receivables are debts owed to your company, usually from sales on credit. Accounts receivable is business asset, the sum of the money owed to you by customers who haven’t paid.The standard procedure in business-to-business sales is that...