For the year ended December 31, 2007, Challenger Company reported the following financial information:

Revenue $100,000

Cost of goods sold (40,000)

Cash operating expenses (20,000)

Depreciation expense (5,000)

Tax expense (3,000)

Net income $32,000

Increase in accounts receivable $7,500

Decrease in inventory $2,500

Increase in short-term notes payable $3,000

Decrease in accounts payable $1,000

Calculate cash flow from operating activities using the direct method and the indirect method.

Direct method Indirect method

A) $31,000 $34,000

B) $31,000 $31,000

C) $34,000 $34,000

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Click for Answer and Explanation

CFO is the same under both methods, the only difference is presentation. Direct method: $92,500 cash collections ($100,000 revenue – $7,500 increase in receivables) – $38,500 cash paid to suppliers (– $40,000 COGS + $2,500 decrease in inventory – $1,000 decrease in payables) – $20,000 cash operating expenses – $3,000 tax expense = $31,000. Indirect method: $32,000 net income + $5,000 depreciation expense – $7,500 increase in receivables + $2,500 decrease in inventory – $1,000 decrease in payables = $31,000. The increase in short-term notes payable is a financing activity.