Maestrom co. Income Statement Year6 Year5 Year4 Sales 117,200.0 93,750,0 75,000.

Question

Maestrom co. Income Statement Year6 Year5 Year4 Sales 117,200.0 93,750,0 75,000.0 Cost of goods sold 82,040.0 65,625.0 52,500.0 Gross profit 35,160.0 28,125.0 22,500.0 Sgand A expenses 7,000.0 5,000.0 2,000.0 Depreciation expense 10,000.0 10,000.0 10,000.0 Taxes 7,262.0 5,250.0 4,200.0 Net Income 10,898.0 7,875.0 6,300.0 Maestrom co. Balance Sheet Assets Year6 Year5 Year 4 Cash 13,773.0 17,875.0 40,000.0 Accounts Receivable 170,000.0 120,000.0 50,000.0 Inventory 140,000.0 110,000.0 80,000.0 Land 50,000.0 50,000.0 50,000.0 Buildings and Equipment 100,000.0 100,000.0 100,000.0 Less: Accumulated Depreciation Total assets Liabilities Accounts Payable 145,000.0 90,000.0 30,000.0 Sharehoklers' Equity Common stock 125,000.0 125,000.0 125,000.0 Retained eamings 143,773.0 132,875.0 125,000.0 Total Liabilities and S/E 413,773.0 347,875.0 280,000.0 Explain why the accrual basis of accounting creates the need for a statement of cash flows.

Explanation / Answer

In accrual basis the revenue is recognized irrespective of whether cash is received or not and same with expenses if it paid or not. So statement of cash flow gives correct picture of current cash position of the company

Cash for 2015 from Operating activities:

Net income in 2015+ Depreciation +change in inventory+change in account receivable+Chnage in account payable
=7875+10000+(50000-120000)+(80000-110000)+(90000-30000)
=$-22,185

Cash in Year 5= cash in year 4+ Cash for 2015 from Operating activities
=-22185+40000=$17875

Here the actual change in cash is different from change in net income, As increase in inventories and account receivable means cash outflow, Increase in account payable means cash inflow

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