(Calculating cash from operations using both the direct and indirect methods, LO 1, 3, 4) You are provided the following balance sheet information and summarized income statement for Katrime Ltd.:

Accounts payable pertains exclusively to the purchase of inventory. Other Expenses were fully paid in cash during the year.
Required:

a. Prepare Katrime’s cash from operations section of the cash flow statement using the direct method.

b. Prepare Katrime’s cash from operations section of the cash flow statement using the indirect method.

c. Which method do you think is more informative to users of the cash flow statement? Explain. What information is available when the direct method is used that is not available when the indirect method is used?

d. Explain the difference between net income and cash from operations. Why did Katrime have a profit on its income statement but negative cash from operations?

e. What are the implications of showing a profit on the income statement but negative cash from operations?

Transcribed Image Text:

Katrime Ltd. Current Operating Assets and Liabilities as of May 31, 2004 and 2005 2006 2005 Accounts receivable $427,000 $278,000 Inventory Prepaid insurance 2006 2005 Accounts payable $392,000 $315,000 72,000 85,000 818,000 566,000 Wages payable 72,000 35,000