Cash Flows from Operating Activities—Indirect Method The net income reported on
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Question
Cash Flows from Operating Activities—Indirect Method
The net income reported on the income statement for the current year was $128,500. Depreciation recorded on store equipment for the year amounted to $21,200. 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 and for any adjustments, if required.
Statement of Cash Flows (partial)
Cash flows from operating activities:
$
Adjustments to reconcile net income to net cash flow from operating activities:
Changes in current operating assets and liabilities:
Net cash flow from operating activities
$
b. Cash flows from operating activities differs from net income because it does not use the Selectaccrual basiscash basisCorrect 1 of Item 2 of accounting. For example revenues are recorded on the income statement when Selectthey are earnedcash is receivedCorrect 2 of Item 2.
End of Year Beginning of Year Cash $49,090 $44,670 Accounts receivable (net) 35,200 33,010 Merchandise inventory 48,060 50,250 Prepaid expenses 5,400 4,240 Accounts payable (merchandise creditors) 46,000 42,260 Wages payable 25,130 27,610Explanation / Answer
Answer a. Partial Statement of Cash Flows (Indirect Method) Cash Flow from opearating activities: Net Income 128,500 Add/(Less) non cash effects on operating activities Depreciation 58,000 Changes in Current operating assets & Liabilities Increase in Accounts Receivables (2,190) Decrease in Inventory 2,190 Increase in Prepaid Expenses (1,160) Increase in Accounts Payables 3,740 Decrease in Wages Payable (2,480) 58,100 Net Cash provided by operating activities 186,600 Answer b. Cash flows from operating activities reports the cash inflow or outflow from a company’s day-to-day operations. Net income reports the excess of revenues over expenses for a company using the accrual basis of accounting. Revenues are recorded when they are earned, not necessarily when cash is received. Expenses are recorded when they are incurred and matched against revenue, not necessarily when cash is received. As a result, the cash flows from operating activities differs from net income because it does not use the accrual basis of accounting.
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