Thus the balance in interest expense overstates the

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Unformatted text preview: Payable implies that the company purchased some of its inventory on account rather than for cash. Thus, the increase in Accounts Payable has to be deducted from COGS to offset the increase in Merchandise Inventory added to COGS that did not really reflect cash outflows. Interest Expense 1. An increase in Interest Payable would be deducted from accrual­basis interest expense because the increase implies that the company incurred interest expense, but has not yet paid it. Thus, the balance in Interest Expense overstates the amount of cash disbursed during the year for interest. 2. An increase in Prepaid Interest implies that the company disbursed cash during the year to cover future interest expense. Since the cash disbursement is not reflected in the current period's interest expense, the increase in Prepaid Interest would be added to accrual­basis interest expense to arrive at cash outflows associated with interest. 3. An increase in Discount on Bonds Payable does not affect interest expense per se; it indicates that the company issued additional bonds at less than face value. However, the net increase in the discount is comprised of two components. First, the discount balance increases for the discount associated with the new bonds issued. Second, the discount balance decreases for the amount of the discount balance amortized during the accounting period. Since the amount of the amortized discount flows into interest expense, the amount of the discount amortized would be deducted from accrual­basis interest expense. Consequently, the discount account would have to be analyzed in depth to determine the magnitude of these two components. Similarly, the balance in Premium on Bonds Payable would have to be analyzed in depth. E14–7 a. Hamilton Direct method Cash collections from customers 900,000 Cash paid for inventory (400,000) $ Watson 900,000 (400,000) $ Cash paid for other expenses (200,000) Net cash flow from operating activities 300,000 Indirect method Net income 200,000 Adjustments: Depreciation expense 100,000 Net cash flow from operating activities 300,000 (200,000) $ 300,000 $ $ 250,000 $ 50,000 $ 30...
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This homework help was uploaded on 03/03/2014 for the course ACCT 5053 taught by Professor Staff during the Fall '08 term at Oklahoma State.

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