Cash Flows from Operating Activities—Indirect Method The net income reported on

Question

Cash Flows from Operating Activities—Indirect Method

The net income reported on the income statement for the current year was $144,400. Depreciation recorded on store equipment for the year amounted to $23,800. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows:

a. Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method. Use the minus sign to indicate cash out flows, cash payments, decreases in cash, or any negative adjustments.

b. Cash flows from operating activities differs from net income because it does not use the of accounting. For example revenues are recorded on the income statement when .

End of Year Beginning of Year Cash $57,180 $52,030 Accounts receivable (net) 41,000 38,450 Merchandise inventory 55,980 58,530 Prepaid expenses 6,290 4,940 Accounts payable (merchandise creditors) 53,580 49,220 Wages payable 29,280 32,150

Explanation / Answer

a Statement of Cash Flows (partial) Cash flows from operating activities: Net income 144400 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation expense 23800 Changes in current operating assets and liabilities: Increase in accounts receivable -2550 Decrease in merchandise inventory 2550 Increase in prepaid expenses -1350 Increase in accounts payable 4360 Decrease in wages payable -2870 Net cash flow from operating activities 168340 b Cash flows from operating activities differs from net income because it does not use the accrual basis of accounting. For example revenues are recorded on the income statement when they are earned

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