31. Operating Activities Section Using the Indirect Method. The following income

ID: 2579660 • Letter: 3

Question

31. Operating Activities Section Using the Indirect Method. The following income statement and current sections of the balance sheet are for Polson, Inc. Polson, Inc. Income Statement for the Year Ended December 31, 2017 Sales Cost of goods sold Gross margin Selling and administrative expenses Depreciation expense Operating income Loss on sale of equipment Income before taxes Income tax expense Net income $990,000 520,000 $470,000 110,000 63,000 297,000 (4,100) 292,900 112,900 180,000 December 31 2017 2016 Current assets Cash Accounts receivable Merchandise inventory Prepaid expenses $62,000 21,000 45,000 11,000 76,000 24,000 33,000 12,200 Current liabilities Accounts payable Income tax payable 53,000 8,600 60,500 13,400 Required: a. Using the indirect method, prepare the operating activities section of the statement of cash flows for Polson, Inc., for the year ended December 31, 2017. Use the format presented in Figure 12.5 b. How much cash was provided by (used by) operating activities? Briefly describe what this amount tells us about the

Explanation / Answer

Polson Inc.

CASH FLOW STATEMENT FOR THE YEAR ENDED DEC 31,2017

Cash flows from operating activities

Net income

1,80,000.00

Adjustments to convert net income to cash provided by operating

activities:

Add back depreciation expense

63,000.00

Add back loss on sale of equipment

4,100.00

Decrease in accounts receivable

3,000.00

Increase in merchandise inventory

-12,000.00

Decrease in prepaid expenses

1,200.00

Decrease in accounts payable

-7,500.00

Decrease in income tax payable

-4,800.00

Cash provided by operating activities

2,27,000.00

b) Net cash generated by operating activities is $227000. This amount tells us that general operation of company generates 227000 apart from investing and financing activities. This cash will be reflected in retained earnings of company.