PROBLEM 5-4

(a) DIRECT METHOD

Collections from customers 6,220,000

Payments to trade creditors - 4,140,000
Payments for salaries - 720,000
Payments for insurance - 560,000
Cash generated from operations 800,000
Income taxes paid - 252,000
Interest paid - 175,000
Net cash from operating activities 373,000

(b) INDIRECT METHOD

Profit before income tax 1,080,000

Gain on sale of equipment - 100,000
Depreciation expense 220,000
Operating income before capital working charges 1,200,000
Decrease in accounts receivable 120,000
Increase in inventory - 280,000
Decrease in accounts payable - 160,000
Increase in prepaid insurance - 180,000
Increase in salaries payable 100,000
Cash generated from operations 800,000
Income taxes paid - 252,000
Interest paid - 175,000
Net cash from operating activities 373,000