SE9-5A. Evaluate adjustments to net income using the indirect method. (LO 5). Th

Question

SE9-5A. Evaluate adjustments to net income using the indirect method. (LO 5). The income statement for Lilly’s Company for the year ended June 30, 2010, showed sales of $50,000. During the year, the balance in accounts receivable increased by $7,500. What adjustment to net income would be shown in the operating section of the statement of cash flows prepared using the indirect method related to this information? How much cash was collected from customers during the fiscal year ended June 30, 2010?

Explanation / Answer

Operating Section of Cash flow Statement (Indirect Method)

Net income

$50000

Less: Increase in accounts receivable

($7500)

Cash flow from operating activities

$42500

Cash collected from customers during the fiscal year ended June 30, 2010?

This amount will be calculated as follow;

Sale for the year …………………………………..……..$50000

Less: Incresae in accounts receivable……………$7500

Cash collected from customers ($50000 – $7500) = $42500

Note:

As we know that increase in accounts receiavble means amount not received from customers during the year.

Operating Section of Cash flow Statement (Indirect Method)

Net income

$50000

Less: Increase in accounts receivable

($7500)

Cash flow from operating activities

$42500

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