Errors in Reporting Cash Flow from Operating Activities Starkovich Architects, Inc. uses the direct format to prepare the statement of cash flows. At year end 2004, the following comparative balance sheet and abbreviated income statement were available as shown.
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31 Dec |
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Comparative Balance Sheet |
2004 |
2003 |
Income Statement for 2004 |
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|
Cash |
$3,400 |
$2,750 |
Service revenue |
$73,000 |
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Accounts receivable |
5,800 |
4,300 |
Commission revenue |
42,100 |
|
Inventory |
4,700 |
5,100 |
Advertising expense |
13,400 |
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Land |
10,000 |
10,000 |
Rent expense |
24,000 |
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Total assets |
$23,900 |
$22,150 |
Wages expense |
42,600 |
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Rent payable |
$2,500 |
$2,900 |
Taxes expense |
12,000 |
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Taxes payable |
1,600 |
1,600 |
Net income |
$23,100 |
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Wages payable |
3,200 |
1,050 |
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Common stock |
15,000 |
15,000 |
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Retained earnings |
1,600 |
1,600 |
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Total liabilities and equity |
$23,900 |
$22,150 |
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From this information, the accounting staff prepared the operating activities section of the statement of cash flows shown on the following page using the direct format.
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Starkovich Architects, Inc. |
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Operating Activities |
$115,100 |
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Cash received from customers |
13,400 |
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Cash paid for advertising |
23,600 |
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Cash paid for rent |
40,450 |
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Cash paid for wages |
11,000 |
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Cash paid for taxes |
$26,650 |
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Cash provided by operating activities |
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Required
A. What evidence can you identify to suggest that certain items are misstated in the computation of cash flow from operating activities? For each item that you believe is misstated, specify why you know this. (You may assume that the income statement and balance sheets are correct as presented.)
B. Prepare a revised computation of cash flow from operating activities incorporating the necessary changes.