ACC421:Compare and contrast the direct method and the indirect method for reporting

ACC 421
Intermediate Financial Accounting
I
Axia College of University of Phoenix
(UoP)

Intermediate Accounting
Weygandt, Kieso, Warfield

Week Five (Week 5)

Problem
23-7 (P23-7) (SCF-Direct and Indirect Methods from Comparative Financial
Statements) George Winston Company, a major retailer of bicycles and
accessories, operates several stores and is a publicly traded company. The
comparative statement of financial position and income statement for Winston as
of May 31, 2008, are shown on the next page. The company is preparing its
statement of cash flows.

AND SO ON

The following
is additional information concerning Winston’s transactions during the year
ended
May 31, 2008.
1. All sales during the year were made on
account.
2. All merchandise was purchased on account, comprising the total
accounts payable account.
3. Plant assets costing $98,000 were purchased by
paying $48,000 in cash and issuing 5,000 shares of stock.
4. The “other
expenses” are related to prepaid items.
5. All income taxes incurred during
the year were paid during the year.
6. In order to supplement its cash,
Winston issued 4,000 shares of common stock at par value.
7. There were no
penalties assessed for the retirement of bonds.
8. Cash dividends of $105,000
were declared and paid at the end of the fiscal year.

Instructions
(a)
Compare and contrast the direct method and the indirect method for reporting
cash flows from operating activities.
(b) Prepare a statement of cash flows
for Winston Company for the year ended May 31, 2008, using the direct method. Be
sure to support the statement with appropriate calculations. (A reconciliation
of net income to net cash provided is not required.)
(c) Using the indirect
method, calculate only the net cash flow from operating activities for Winston
Company for the year ended May 31, 2008.