a)Financial statements concerned with cash funds are usually known as cash flow statements. Statement of cash flows reports a firms major cash inflows and outflows for a period. It reports the cash flows by three types of activities: cash flows from operating, investing and financing activities.
There are two alternatives methods for reporting cash flows from operating activities in the statement of cash flows. These methods are: (1) the direct method, and (2) the indirect method.
The direct method reports the sources of operating cash and the uses of operating cash.
The indirect method reports the operating cash flows by beginning with net income and adjusting it for revenues and expenses that do not involve the receipt or payment of cash.
Here, Jan Bell, uses the direct method to prepare its statement of cash flows. This can be clearly seen from the statement of cash flow under the cash flows from the operating activities provided by the Jan Bell Marketing Inc. The net income is not reported at the beginning of the cash flow statement and the transactions are not adjusted for revenues and expenses that do not involve the receipt and payment of cash. It has also no non-cash expenses added to the Jan Bells statement of cash flow.
The manner of reporting cash flows from investing and financing activities is the same under the direct and indirect methods. In addition, the direct and indirect method will report the same amount of cash flows from the operating
activities. However, the methods differ in how the cash flows from the operating activities data are obtained, analyzed and reported. The direct method reports the sources of operating cash, in which, the major source of cash is cash received from customers and the major uses of operating cash contains cash paid to supplier for merchandise and services and cash paid to employees for wages. The differences with the indirect method is that it reports the operating cash flow beginning with the net income and adjusting it for revenues and expenses that do not involve the receipt or payment for cash. It focuses on the differences between net income and cash flows from operations. Indirect method shows the relationship between the income statement, balance sheet and the statement of cash flow.
b)Many companies prepare their statement of cash flow in an indirect basis because it is easier to determine the net income (from income statement) rather than sales to all individual customers and payment to all suppliers. It provides all readily available data. Indirect method is normally less costly and more efficient than the direct method. It is also faster and less time consuming. If u prepare using direct method, the indirect method must also be used in preparing a supplemental reconciliation of net income with cash flow from operation. The major advantage of this indirect method is that it focuses on the differences between the net income statement, the balance sheet and the statement of cash flow.
c)The reconciliation of depreciation and amortization $8,704
i) Journal Entry to record depreciation and amortization for the yearended February 3, 1996:
DrDepreciation expenses ………………….$ 7,575
CrAccumulated depreciation ………………$ 7,575
DrAmortization expense ……………………$ 1,129
CrAccumulated Amortization …………….$ 1,129
ii)Depreciation is added to the net loss because it is a non-cash expense. Even though if it was deducted from revenue, it will not affect cash. Depreciation expense reduced the net income but did not require an outflow of cash. Therefore, it is added to net loss in determining cash flows from operating activities.
The company will not generate more cash even if Jan Bell depreciates its assets more quickly since it does not affect cash.
d)The cash-based equivalent of Net Sales appears on the operating activitiesunder the cash received from customers.
In the reconciliation of net loss, net sales appear on the increase or decrease of asset under accounts receivables. Because decrease in receivables means that the cash received is not considered earlier and therefore has to be considered now.
To calculate the net income of February 3, 1996:
(Accounts receivable 1995 – Accounts receivable 1996) + Net sales 1996
= ($ 12,156 – $ 5,855) + $ 254,004
= 6,301 + 254,004
= $ 260, 305
* The answer should be $ 260,304, but its ok because the differences of $1 is due to rounding off.
e)The cash-based equivalent of cost of sales appears on Jan Bell’s statement of cash flows in operating activities under the cash paid to suppliers and employees.
The reconciliation of net loss to operating cash flows appears in inventories under the accounts payable section.