A company completed its income statement and balance sheet for the year and prov

Question

A company completed its income statement and balance sheet for the year and provided the following information: Income Statement Service Revenue $55,000 Expenses: Salaries 42,500 Rent 7,200 Depreciation 6,800 Amortization of copyrights 1,000 Total Expenses 57,500 Net loss $(2,500) Partial Balance Sheet Current Year Prior Year Accounts receivable $ 7,000 $16,000 Salaries Payable 14,000 7,200 Prepaid rent 2,200 8,400 In addition, the company bought a small piece of equipment costing $6,500. Required: 1. Prepare the operating activities section of the statement of cash flows using the indirect method. 2. Explain why the company was able to report positive operating cash flow despite having a net loss for the year.

Explanation / Answer

1. Cash flows from operating activties: Net income -2500 Depreciation expense +6800 Amortization expense +1000 Decrease in accounts receivable +9000 Increase in salaries payable +6800 Decrease in prepaid rent +6200 Net cash flows from operating activities 27300 2. The company not only collected enough accounts receivable to account for this year, but also enough to account for some sales that occurred last year (in other words, they collected more A/R than they accrued). A similar thing can be said for salaries payable, however it is switched. In this case, they paid less than they accrued, but means that there was less of a cash outflow. In addition, the net loss included depreciation expense and amortization expense, which do not involve an outflow of cash.

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