Question
The income statement of Harborview Retail Co and additional information for 2025 are shown below.
| Income Statement — For the Year Ended December 31, 2025 |
|---|
| Sales Revenue | 180,000 |
| Cost of Goods Sold | (105,000) |
| Gross Profit | 75,000 |
| Operating Expenses | (38,000) |
| Interest Expense | (1,800) |
| Income Before Income Tax | 35,200 |
| Income Tax Expense | (6,200) |
| Net Income | 29,000 |
Additional information:
- Accounts receivable decreased by $5,000 during the year.
- Inventory decreased by $4,000 and accounts payable decreased by $3,500.
- Operating expenses include depreciation of $9,000. Accrued operating liabilities increased by $1,500.
- Interest of $1,800 and income taxes of $6,200 were paid in cash.
- Equipment was purchased for $22,000 cash.
- Borrowings of $10,000 were received in cash, and cash dividends of $8,000 were paid.
- Cash and cash equivalents were $12,000 at the beginning of the year and $37,000 at the end.
Instructions: Prepare a statement of cash flows using the DIRECT method (IAS 7). In addition to the main statement, present a separate supporting schedule (working) for each of: Cash Received from Customers, Cash Paid to Suppliers, Cash Paid for Operating Expenses — showing step by step how each figure is derived.
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 7 — Statement of Cash Flows
The direct method reports actual operating cash receipts and payments by category rather than reconciling from profit. Each line is built by converting an accrual figure to cash — revenue adjusted for the movement in receivables, purchases adjusted for the movements in inventory and payables, and so on.
Common mistakes
- Reporting the accrual amount unchanged because the related working-capital account happened to be given.
- Omitting a supporting schedule when the question asks for the workings behind each converted line.
- Producing operating cash flow that does not agree with what the indirect method would give — the two must reconcile.
Further readingDirect vs indirect method cash flow