Statement of Cash Flows—Direct Method Bannack Corp. is in the process of preparing its statement of cash fl ows for the year ended June 30, 2010. An income statement for the year and comparative balance sheets are as follows:

LO4,5 For the Year Ended June 30, 2010 Sales revenue $400,000 Cost of goods sold 240,000 Gross profi t $160,000 General and administrative expenses $ 40,000 Depreciation expense 80,000 Loss on sale of plant assets 10,000 Total expenses and losses $130,000 Income before interest and taxes $ 30,000 Interest expense 15,000 Income before taxes $ 15,000 Income tax expense 5,000 Net income $ 10,000 June 30 2010 2009 Cash $ 25,000 $ 40,000 Accounts receivable 80,000 69,000 Inventory 75,000 50,000 Prepaid rent 2,000 18,000 Total current assets $ 182,000 $ 177,000 Land $ 60,000 $ 150,000 Plant and equipment 575,000 500,000 Accumulated depreciation (310,000) (250,000)

Total long-term assets $ 325,000 $ 400,000 Total assets $ 507,000 $ 577,000 Accounts payable $ 145,000 $ 140,000 Other accrued liabilities 50,000 45,000 Income taxes payable 5,000 15,000 Total current liabilities $ 200,000 $ 200,000 Long-term bank loan payable $ 75,000 $ 150,000 Common stock $ 100,000 $ 100,000 Retained earnings 132,000 127,000 Total stockholders’ equity $ 232,000 $ 227,000 Total liabilities and stockholders’ equity $ 507,000 $ 577,000 Dividends of $5,000 were declared and paid during the year. New plant assets were purchased during the year for $125,000 in cash. Also, land was sold for cash at its book value. Plant assets were sold during the year for $20,000 in cash. The original cost of the assets sold was $50,000, and their book value was $30,000. A portion of the bank loan was repaid.

Required 1. Prepare a statement of cash fl ows for 2010 using the direct method in the Operating Activities section.

2. Evaluate the following statement: Whether a company uses the direct or indirect method to report cash fl ows from operations is irrelevant because the amount of cash fl ow from operating activities is the same regardless of which method is used.

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