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The income statement of Kyonggi Inc
The income statement of Kyonggi Inc. in Suwon, Korea, contains the following condensed information (currency unit in thousand Korean won, ? 000’s):
KYONGGI INC.
Income Statement
Year Ended December 31, 2019
Sales ? 6,583,000
Cost of goods sold 3,427,000
Gross profit 3,156,000
Operating expenses 2,349,000
Profit from operations 807,000
Interest expense 124,000
Profit before income tax 683,000
Income tax expense 203,000
Profit ? 480,000
Kyonggi Inc. showed the following selected current asset and current liability balances on its year-on-year comparative statement of financial position on December 31, 2019:
2019 2018 Increase (Decrease)
Cash ?150,000 ? 30,000 ?120,000
Accounts receivable 775,000 610,000 165,000
Merchandise inventory 834,000 867,000 (33,000)
Accounts payable 521,000 501,000 20,000
Income tax payable 53,000 25,000 28,000
Additional information:
- The company uses a perpetual inventory system.
- Operating expenses include salaries expense of ?1,000,000, depreciation expense of ?300,000, amortization expense of ?80,000, and a loss on the disposal of machinery of ?24,000.
- Used machinery was sold for ?270,000, at a loss of ?24,000.
- New machinery was purchased during the year for ?1,250,000. It was partially financed by a bank loan payable issued for ?400,000.
- Dividends paid in 2019 totaled ?100,000.
Instructions:
- Prepare the statement of cash flows using the indirect method. (40%)
- Prepare the statement of cash flows using the direct method. (40%)
- Identify the similarities and differences between your answers in parts A and B. (20%)
Expert Solution
| A. Cash Flow Statement using the Indirect Method | ||
| Particulars | Amount (?) | TOTAL (?) |
| Cash Flow From Operating Activities | ||
| Net Income | 480,000 | |
| Ajustments for non cash items | ||
| Depreciation | 300,000 | |
| Amortisation Expenses | 80,000 | |
| Loss on sale or Machinery | 24,000 | |
| Changes to Working Capital | ||
| Account Receivables | -165,000 | |
| Merchandise Inventory | 33,000 | |
| Account Payable | 20,000 | |
| Income Taxes Payable | 28,000 | |
| Net Cash Flows from Operating Activity | 800,000 | |
| Cash flow from Investing Activities | ||
| Sales of Machinery | 270,000 | |
| Purchase of Machinery | -850,000 | |
| Net cash flow from Investing Activity | -580,000 | |
| Cash flow from Financing Activity | ||
| Dividend Paid | -100,000 | |
| Net Cash Flows from Financing Activity | -100,000 | |
| Net Cash Flows during the year | 120,000 | |
| ADD : Beginning Balance | 30,000 | |
| Ending Balance | 150,000 | |
| B. Cash Flow Statement using the Direct Method | ||
| Particulars | Amount (?) | TOTAL (?) |
| Collection from Customers (610,000 + 6,583,000 -775,000) | 6,418,000 | |
| Less: Payment of Income Taxes (25,000 + 203,000 - 53,000) | -175,000 | |
| Less: Payment of Interest | -124,000 | |
| Less: Payment of Operating Expenses (2,349,000 -24,000 - 300,000 - 80,000) | 1,945,000 | |
| Less: Payment to accounts Payable (3,394,000 + 501,000 -521,000) | 3,374,000 | |
| Net Cash floe from operating Activity | 800,000 | |
| Cash flow from Investing Activities | ||
| Sales of Machinery | 270,000 | |
| Purchase of Machinery | -850,000 | |
| Net cash flow from Investing Activity | -580,000 | |
| Cash flow from Financing Activity | ||
| Dividend Paid | -100,000 | |
| Net Cash Flows from Financing Activity | -100,000 | |
| Net Cash Flows during the year | 120,000 | |
| ADD : Beginning Balance | 30,000 | |
| Ending Balance | 150,000 | |
|
C. The cash flow direct method determines changes in cash receipts and payments, which are reported in the cash flow from the operations section. The indirect method takes the net income generated in a period and adds or subtracts changes in the asset and liability accounts to determine the implied cash flow. There are no differences in the cash flows from investing activities and/or the cash flows from financing activities. |
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