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Unformatted text preview: ary expense
Since no related balance sheet account exists as of December 31, 2011 or as of December 31, 2012, it is
safe to assume that the entire balance in Salary Expense was paid in cash. Therefore, the cash paid for
salaries equals $250,000.
2012 Ending office supply inventory = $75,000 Office supply purchases =
= 2012 Beginning office supply inventory + Office
supplies purchased during 2012 – 2012 Office
$85,000 + Supplies purchased – $175,000
$165,000 Depreciation expense
Depreciation is the allocation of the cost of a fixed asset. Depreciation does not provide cash or use cash;
hence, the cash flow associated with depreciation is zero.
2012 Ending prepaid insurance $50,000 Insurance purchases = 2012 Beginning prepaid insurance + Insurance
purchased during 2012 – 2012 Insurance expense
= $10,000 + Insurance purchased – $60,000
= $100,000 P14–15 Concluded
2012 Ending rent payable $20,000 Rent paid = 2012 Beginning rent payable + 2012 Rent expense – Rent
paid during 2012
= $8,000 + $120,000 – Rent paid
= $108,000 This method would be similar to directly computing net cash flow from operating activities since the
actual cash flow for each component of operating activities is being computed. Under the indirect
method, net cash flow from operating activities is computed by adjusting net income.
b. Net income
Decrease in office supplies inventory
Increase in rent payable
Increase in accounts receivable
Increase in prepaid insurance
Net cash increase due to operating activities
332,000 $ $ 100,000
(40,000) $ This method is similar to the indirect method since net income is adjusted for the change in each
operating account on the balance sheet to arrive at cash flows from operating activities. The
magnitudes of these adjustments are the same as in part (a). However, in part (a) each of these
adjustments was related to an individual operating activity to determine the actual cash inflow or actual
cash outflow associated with the individual operating activity; whereas in part (b) each adjustment is
related to net income to arrive at the overall net cash flow associated with all operating activities.
c. Operating Cash Flows
Direct Method Marketing revenue
Salary expense $
$(45,000) Office supplies exp.
office supplies Adjustments 1,0...
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