You are provided with the following balance sheet information and summarized income statement for Katrime Ltd.:

All sales are credit sales. Accounts payable pertains exclusively to the purchase of inventory. Other expenses were fully paid in cash during the year.

Required:

a. Prepare Katrime’s cash from operations section of the cash flow statement using the indirect method.

b. Calculate these amounts:

i. Cash collected from customers

ii. Cash paid to suppliers of inventory

iii. Cash paid to employees

Use this information to prepare Katrime’s cash from operations section of the cash flow statement using the direct method.

c. Do you think the direct method or indirect method provides more useful information to stakeholders? Explain. What information is available when the direct method is used that isn’t available when the indirect method is used?

d. Explain the difference between net income and cash from operations. Why did Katrime have a profit on its income statement but negative cash from operations?

e. What are the implications of showing a profit on the income statement but negative cash from operations?

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Katrime Ltd. Current Operating Assets and Liabilities As of May 31, 2016 and 2017 2017 2016 2017 2016 Accounts receivable $427,000 $278,000 Accounts payable $392,000 $315,000 Inventory 818,000 566,000 Wages payable 72,000 85,000 Prepaid insurance 72,000 35,000 Katrime Ltd. Income Statement For the Year Ended May 31, 2017 Revenue $1,381,000 Cost of goods sold 735,500 Gross margin 645,500 Wages expense 333,000 Depreciation expense 42,500 Insurance expense 30,000 Other expenses 137,500 Loss on sale of capital assets 27,500 Net income S 75,000