The direct method works fine but I was trying to solve it using the indirect method as they give you NI can someone explain why it doesn’t work? Cash from sale of truck $7k NI: $11K salary paid: $17K cash from customers: $45K Dep expense: $5.5K interst on bank line of credit: $1K cash paid to supplier: $22K Other cash expense: $6.3K Cash tax: $0 Right so using indirect gives you 11 + 5.5 - 17 + 45 - 1 - 22 - 6.3 = 15.2 Direct gives you: 45 - 17 - 1 - 22 - 6.3 = -1.3 which is correct. Why is there this discrepency?
In this situation --> you are not provided with increase and decrease in the various Current Assets and Current Liabilities You are double counting stuff in your indirect method, since you started with Net Income – which included the salary paid, interest on bank line of credit etc. etc. which you are double counting in your method. In this problem, the NI is purely a DISTRACTOR and the idea is to lead you down the wrong path and to waste time. When you see items such as Cash from Customer, Cash paid to Supplier, Other Cash Expense, etc. etc. it is purely a Direct method problem. Problems where you can use both direct and indirect would have a balance sheet + income statement usually provided. CP
Thanks a lot man, makes perfect sense.