Sunshine Enterprises included the following statements in its 1997 financial report. Income Statement 1 997 Marketing revenue $1,000,000 Salary expense (250,000) Office supplies used (175,000) Depreciation expense (100,000) Insurance expense (60,000) Rent expense (120,000) Net income $ 295,000 Balance Sheet 1 997 1996 Cash $ 100,000 $120,000 Accounts receivable 150,000 105,000 Office supply inventory 75,000 85,000 Prepaid insurance 50,000 10,000 Office furniture 500,000 465,000 Less: Accumulated depreciation (325,000) (225,000) Total assets $ 550,000 $560,000 Rent payable $ 20,000 $ 8,000 Common stock ($10 par value) 100,000 100,000 Additional paid-in capital 125,000 125,000 Retained earnings 305,000 327,000 Total liabilities and stockholders’ equity $ 550,000 $560,000 REQUIRED:

a. Convert each of the accrual-basis income statement accounts to a cash basis. Would you classify this method as directly or indirectly computing cash provided (used) by operating activities?

b. Prepare a proof of results. That is, begin with net income and adjust net income to arrive at cash provided (used) by operating activities. Would you classify this method as directly or indirectly computing cash provided (used) by operating activities?

c. Refer to Figure 14-23 in the chapter, and use the same format to reconcile the income statement with operating cash flows.