Costco Wholesale Corporation operates more than 600 warehous

Costco Wholesale Corporation operates more than 600 warehouse stores in the United States and abroad. The following items were in a slightly simplified version of the company’s statement of cash flows for the fiscal year ending August 28,2011 (in millions):

Increase in merchandise inventories

$ 642

Net income

1,542

Depreciation and amortization

855

Other noncash expenses

269

Increase in payables

804

Increase in other operating liabilities, net   

451

Increase in receivables

81

The company’s income statement showed (in millions):

Total revenues

$88,915

Cost of merchandise

77,739

Operating expenses

8,737

Operating income

2,439

Other expenses, net

56

Income before income taxes

2,383

Income tax

841

Net income

$ 1,542

b) Prepare a statement of cash flows from operating activities using the direct method. Assume that all other expenses and income taxes were paid in cash, all operating liabilities relate to operating expenses, and that all depreciation and other noncash expenses are included in operating expenses.

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Increase in merchandise inventories	$ 642
Net income	1,542
Depreciation and amortization	855
Other noncash expenses	269
Increase in payables	804
Increase in other operating liabilities, net	451
Increase in receivables	81

Solution

Workings: Customers a/c Debit Credit Credit sales 88915 Cash recd.(Bal.fig.) 88834 Increase 81 88915 88915 Merchandise inventory COGS 77739 Purchases(Bal.fig.) 78381 Increase 642 78381 78381 Payables a/c Cash paid(Bal.Fig.) 77577 Increase 804 Purchases 78381 78381 78381 Opg. Liabilities a/c Cash paid(Bal.fig.) 7218 New liabilities incurred(8737+56-855-269) 7669 Increase 451 7669 7669 Cash flows from operating activities (Direct method) 1.Cash receipts from customers(88915+81) 88834 2.Cash payments to suppliers(77739+642-804) 77577 3.Cash paid tow.opg.liab.(8737+56-855-269-451) 7218 4.Income tax paid 841 Cash generated from operating activities(1-2-3-4) 3198 VERIFICATION: Cash flows from operating activities (InDirect method) Net income 1542 Add: Adj.for non-cash expenses Depreciation and amortization 855 Other noncash expenses 269 Adjusted Net income 2666 Changes to working capital: Less: increase in merchandise invetories -642 Add: Increase in payables 804 Add: Increase in opg.liab. 451 Less: increase in recivables -81 Cash generated from operating activities 3198