Part I

Claudia is learning about the INDIRECT method of preparing the Statement of Cash Flows and she can already feel the anger rushing to her fists as she looks at the Operating activities section. She has gone through the stupid chapter a dozen times and its not getting any clearer. Why are some increases shown as negative numbers and some shown as positive numbers? She yells at her book before punching it really hard.

As she searches for an ice pack to put on her hand, Claudia concludes that all changes to assets should be reflected as positive numbers on the cash flow statement and all changes to liabilities should be shown as negative numbers.

1. Please comment on Claudias conclusion and offer a correction if necessary. Please attempt to provide a logical reasoning to back up your explanation.

2. One example in Claudias textbook showed the following account changes, as listed below. Please select THREE of the increases/decreases listed and specify in which section they would appear on the cash flow statement and whether they would be displayed as positive or negative numbers. Please be sure to label which items you selected.

a. $9,000 increase in accounts receivable

b. $8,000 decrease in inventory

c. 40,000 increase in investments

d. $3,200 decrease in accounts payable

e. $2,200 increase in salaries payable

f. $6,000 increase in dividends payable

Part II

1. Gains and losses on disposals of assets: Why are gains and losses on disposals of assets treated as adjustments to the cash flows from operations but the cash part of the transaction is a source of funds under the investing section? Shouldnt it all go under one section?

2. Should gains and losses be shown as positive or negative numbers? Please discuss the reason why as part of your answer.