| Course | AC302 Intermediate Accounting III |
|---|---|
| Unit | Unit 5 |
| Paper type | Direct method comparison |
| Length | About 620 words, 5 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | BS in Accounting |
| Updated | October 2026 |
Free sample paper for AC302 Unit 5
Collections of $4,590,000 Instead of Net Income of $502,000: A Unit 5 Direct Method Comparison for a Western Wear Retailer
[Student Name]
Purdue University Global
AC302: Intermediate Accounting III
Unit 5 Direct Method Comparison
[Instructor Name]
[Date]
Brassfield Boot & Western and every amount are composite; the standards and textbook cited are real.
Income Statement Data
Sales $4,650,000; cost of goods sold $2,900,000; operating expenses other than depreciation $940,000; depreciation $120,000; interest expense $64,000, including $4,000 of bond discount amortization; gain on sale of a delivery van $16,000; income tax expense $140,000, of which $10,000 is deferred. Net income: $502,000.
Balance sheet changes: receivables up $60,000; inventory up $80,000; accounts payable up $35,000; prepaid expenses up $50,000; accrued liabilities down $12,000; interest payable up $2,000; income taxes payable down $8,000.
Derivation Schedule
1. Cash received from customers: sales of $4,650,000 less the $60,000 rise in receivables, $4,590,000.
2. Cash paid to suppliers: cost of goods sold of $2,900,000 plus the $80,000 rise in inventory gives purchases of $2,980,000; less the $35,000 rise in payables, $2,945,000.
3. Cash paid for other operating costs: $940,000 plus the $50,000 rise in prepaid expenses and the $12,000 fall in accrued liabilities, $1,002,000.
4. Cash paid for interest: $64,000 less $4,000 of discount amortization and the $2,000 rise in interest payable, $58,000.
5. Cash paid for income taxes: $140,000 less $10,000 deferred, plus the $8,000 fall in taxes payable, $138,000.
Depreciation and the van gain have no line in the direct method, because neither involved operating cash; the van's proceeds go to investing.
The Two Operating Sections
Direct method
1. Cash received from customers: $4,590,000.
2. Cash paid to suppliers: $2,945,000.
3. Cash paid for other operating costs: $1,002,000.
4. Cash paid for interest: $58,000.
5. Cash paid for income taxes: $138,000.
Net cash provided by operating activities: $447,000.
Indirect method
1. Net income: $502,000.
2. Depreciation: add $120,000.
3. Discount amortization: add $4,000.
4. Gain on sale of van: subtract $16,000.
5. Deferred taxes: add $10,000.
6. Receivables: subtract $60,000. Inventory: subtract $80,000. Payables: add $35,000.
7. Prepaid expenses: subtract $50,000. Accrued liabilities: subtract $12,000.
8. Interest payable: add $2,000. Income taxes payable: subtract $8,000.
Net cash provided by operating activities: $447,000.
The direct method answers where Brassfield's cash came from and went, $4.59 million in and $4.14 million out, while the indirect method answers why that cash differs from profit; a lender wants the first, an analyst testing earnings wants the second.
What Each Presentation Shows and Hides
The direct method shows the scale of the business in cash. A reader sees that customers paid $60,000 less than Brassfield billed and that supplier payments absorbed 64 percent of collections. It hides the link to net income, which is why US GAAP makes direct-method preparers add a schedule bridging profit and operating cash anyway (Financial Accounting Standards Board, 1987).
The indirect method shows the quality of earnings. It exposes the $50,000 build-up in prepaid expenses and the $80,000 of extra inventory, both signs that profit outran cash this year. It hides the gross flows; a reader cannot tell from it how much was collected.
The indirect form dominates in practice because it comes straight from the balance sheet and the reconciliation is required anyway. The FASB encouraged the direct method in 1987 and considered requiring it in its financial statement presentation project, but preparers objected to the cost of tracking gross cash flows (Kieso et al., 2019). International standards also allow both methods (International Accounting Standards Board, 1992).
Recommendation
Brassfield's lender asked for monthly cash projections. The direct method's lines map onto those projections, collections and supplier payments, so presenting operating cash directly, with the indirect reconciliation in a note, would serve the lender best.
References
Financial Accounting Standards Board. (1987). Statement of cash flows (Statement of Financial Accounting Standards No. 95). https://www.fasb.org
International Accounting Standards Board. (1992). IAS 7 statement of cash flows. IFRS Foundation. https://www.ifrs.org
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate accounting (17th ed.). Wiley.
Reading the AC 302 Unit 5 instructions
The fifth AC302 unit asks students to prepare the operating section both ways and compare them. Start from the income statement and the balance sheet changes. Derive each gross cash flow in a schedule: sales adjusted for receivables, cost of goods sold adjusted for inventory and payables, other expenses adjusted for prepaid and accrued items, interest adjusted for amortization and interest payable, and tax expense adjusted for deferred taxes and taxes payable. Leave out depreciation and gains, which have no direct-method line. Prepare the indirect section from net income. Show both reaching the same total. Then explain what each method reveals and what it hides, and why the indirect method dominates in practice. Many sections ask for a recommendation for a specific reader. Cite SFAS 95, IAS 7 and the textbook in APA 7.
How the AC 302 Unit 5 example is put together
The sample begins with the income statement data and seven balance sheet changes. A derivation schedule turns each line to cash in numbered steps: $4,650,000 of sales less $60,000 of receivables, purchases of $2,980,000 less $35,000 of payables, $940,000 of expenses plus $50,000 of prepaid and $12,000 of reduced accruals, interest net of $4,000 of discount amortization, and tax net of $10,000 deferred. The two operating sections follow, both ending at $447,000. The highlighted sentence states what each method answers. A section explains what the direct method shows, the scale of collections and payments, and what the indirect method shows, the prepaid and inventory build-up. It notes the FASB's encouragement, the cost objection and the IFRS choice. The recommendation favors the direct form for the lender.
Reading the AC302 Unit 5 grading rubric
This AC302 comparison is graded first on the derivations: each gross cash line must be correct and traceable. The direct section and the indirect section must reach the same total, which is itself a check the grader uses. Excluding depreciation and gains from the direct method shows understanding. The comparison earns the analytical points, so it should name specific things each method reveals in this company's numbers, not general textbook statements. Mentioning the required reconciliation for direct-method preparers shows knowledge of the standard. A recommendation tied to a named reader demonstrates judgment. The international comparison adds a point in many sections. Side-by-side layout makes the work easy to check. For Purdue Global, SFAS 95, IAS 7 and the textbook are cited in APA 7 beside the claims they support.
AC302 Unit 5 help from the desk
Direct method derivations go wrong most often on direction: adding a rise in receivables to sales, or subtracting a rise in payables from purchases twice. Students include depreciation as a cash payment. Interest is reported at the expense figure without removing discount amortization. Income taxes paid ignore the deferred portion. Some papers present only the direct column and forget that the reconciliation is still required. The comparison often repeats the textbook's list of pros and cons without using the company's figures. A recommendation is missing or not tied to a reader. If your problem includes bad debt write-offs, inventory write-downs or a change in unearned revenue, a writer can derive each cash line and prepare both sections for your section's data.
Get an AC302 Unit 5 example written to your instructions
An income statement, two balance sheets and whatever your Unit 5 problem says about disposals, amortization and taxes are all the direct column needs; add the rubric and any format your instructor posted. Both presentations, the derivations and the comparison arrive within 24-48h. The first custom sample carries no charge. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
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AC302 Unit 5 questions, answered
Why do so few companies use the direct method if it is encouraged?
Mostly cost. Ledgers record accruals, so the gross cash lines have to be derived, and a direct presenter must still provide the indirect reconciliation as a supplementary schedule, which means preparing both. Many lenders and analysts also read the reconciliation for working capital signals. The AC302 comparison page gives these reasons in two sentences and then returns to what the unit actually grades: the derivations.
What if the problem asks only for the direct method?
Many AC302 samples include the indirect reconciliation anyway, since US GAAP requires it whenever the direct method is used. If your prompt limits the answer to the direct column, the reconciliation appears as the required schedule rather than as a second column, and the comparison page shrinks to a paragraph. The derivation schedule stays either way, because graders check it line by line.
Where can I find a free AC302 Unit 5 sample paper?
This page provides a complete AC302 Unit 5 direct method comparison for a composite western wear retailer, with a derivation schedule, both operating sections at $447,000, an analysis of each method and APA 7 references.
How are payments to suppliers found in the AC302 Unit 5 sample?
Cost of goods sold of $2,900,000 plus the $80,000 rise in inventory gives $2,980,000 of purchases. The $35,000 rise in payables means less was paid, so payments are $2,945,000.
How is cash paid for other operating costs worked out in AC302 Unit 5?
Start from $940,000 of expenses excluding depreciation. Prepaid expenses rose $50,000 and accrued liabilities fell $12,000, both meaning more cash left, so payments were $1,002,000.