The net income reported on the income statements for the current year was $400,0

ID: 2424270 • Letter: T

Question

The net income reported on the income statements for the current year was $400,000. Depreciation recorded on the store equipment for the year amounted to $16,000. 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.

b. If the direct method had been used, would the net cash flow from operating activities have been the same? Explain.

Net cash flow from operating activities, $394,400

End of Year Beginning of Year Cash $89,600 $96,000 Accounts receivable (net) 112,000 118,400 Merchandise inventory 224,000 200,000 Prepaid expenses 12,800 14,400 Accounts payable (merchandise creditors) 96,000 104,000 Wages payable 16,000 13,600

Explanation / Answer

Statement of Cash flow

Cash Flow from Operating Activities

Net Income

$400000

Adjustment for:

Depreciation

$16000

Decrease in Accounts receivables

$6400

Increase in Merchandise inventory

($24000)

Decrease Prepaid Expenses

$1600

Decrease in Accounts Payable

($8000)

Increase in wages Payable

$2400

$21600

Cash Generated from Operations

$394400

The net cash flow from operating activities will be the same under Direct method also. The increase or decrease in cash resulting from a company’s daily operations is not impacted by the manner of presentation(i.e. direct or indirect method)