Question

P17-3B Sable Island Ltd. is a private company reporting under ASPE. Its income statement contained the following condensed information: $900,000 SABLE ISLAND LTD. Income Statement Year Ended December 31, 2017 Fees earned Operating expenses $642,000 Depreciation expense 50,000 Gain on sale of equipment (23,000) Profit from operations Other expenses Interest expense Profit before income tax Income tax expense Profit 669,000 231,000 5,000 226,000 56,500 $169,500

Answer 1

SABLE ISLAND COMPANY

Partial Statement of Cash Flows

For the Year Ended December 31, 2017

Cash from Operating Activities using Indirect Method

Particulars	Amount
Net income	$ 169,500.00
Add: Depreciation expense	$   50,000.00
Add: Provision for Tax	$   56,500.00
Less: Gain on disposal	$ (23,000.00)
Add: Interest	$     5,000.00
Add: Decrease in accounts receivable	$     8,000.00
Less: Increase in Prepaid Expenses	$    (2,500.00)
Add: Increase in accounts payable	$     5,000.00
Add: Increase in Interest Payable	$        450.00
Add: Increase in Unearned Revenue	$     3,750.00
Less : Income Tax Paid(3)	$ (61,750.00)
Cash flow from operating activities	$ 210,950.00

Particulars	2017	2016	Increase(Decrease)
Accounts receivable	48,000	56,000	$            (8,000.00)
Prepaid Expenses	14,000	11,500	$              2,500.00
Accounts payable	41,000	36,000	$              5,000.00
Income taxes payable	4,000	9,250	$            (5,250.00)
Interest Payable	1,000	550	$                 450.00
Unearned Revenue	13,750	10,000	$              3,750.00

Working Notes

1. Computation of cash receipts from customers:

Service revenue .......................................................................$900,000

Add : Decrease in accounts receivable ($56,000 – $48,000)..$ 8,000

Add: Increase in Unearned Revenue ($ 13,700 - $ 10,000) ...$ 3,750

Cash receipts from customers................................................ $911,750

2.Computation of cash payments:

Operating expenses per income statement ..........................$642,000

Less: Increase in accounts payable ($41,000 – $36,000)......$ 5,000

Add: Increase in prepaid Expenses ($14,000 - $ 11,500)......$ 2,500

Less: Increase in Interest Payable ($ 1000 - $ 550) ............$ 450

Cash payments for operating expenses............................... $639,050

3.Income tax expense per income statement.................. $56,500

Add: Decrease in income taxes payable ($9,250 – $4,000)..... $ 5,250

Cash payments for income taxes.................................... $61,750

SABLE ISLAND COMPANY

Partial Statement of Cash Flows

For the Year Ended December 31, 2017

Cash from Operating Activities using Direct Method

Particulars	Amount	Amount
Cash Receipt from Customer(1)		$ 911,750.00
Cash Payments
For Operating Expenses(2)	$     639,050.00
For Income Taxes(3)	$        61,750.00	$ 700,800.00
Net cash generated from operating activities		$ 210,950.00

Advantage of Indirect Method is :

All the non cash items are disclosed in cash flow statement as compare to direct method and also it has direct nexus with financial statement.

Disadvantage of Indirect Method is :

It is complex method and not easily understandable to the general people who not belong to the finance field. Also it contains the unnecessary details which may make chaos among the users.