8.00 points Changes in various accounts and gains and losses on the sale of asse

Question

8.00 points Changes in various accounts and gains and losses on the sale of assets during the year for Argon Company are given below Item Amount Accounts receivable Inventory Prepaid expenses Accounts payable Accrued liabilities Income taxes payable Sale of equipment Sale of long-term investments 79,000 decrease $112,000 increase $ 3,900 decrease $ 47,000 decrease $ 9,700 increase $ 15,100 increase $ 8,300 gain $ 12,300 loss For each item, indicate whether the dollar amount should be added to or deducted from net income under the indirect method when computing the net cash provided by operating activities for the year Amount Effect Accounts receivable Prepaid expenses Accounts payable Accrued iabilities Income taxes payable Sale of equipment S 79,000 S 112.000 3,900 S47,000 9,700 15,100 8,300 Sale of long-term investmentsS 12,300 Type here to searchh

Explanation / Answer

Solution:

Item

Amount

Effect

Explanation

Accounts Receivable

$79,000

Added

Decrease in Accounts Receivable is added back to Net Income. Logic behind this is Decrease shows the realization of Cash from the customer hence the cash is increased

Inventory

$112,000

Deducted

Increase in Inventory means the inventories are purchased and lying in stock. It means Cash is spent on purchase of inventory. Hence deducted from net Income

Prepaid Expenses

$3,900

Added

Claim in current year. hence decrease shows the realization or expensesd in the current year.

Accounts Payables

$47,000

Deducted

Decrease means the Accounts Payable are paid in this yea/ Cash given. Hence deducted.

Accrued Liabilities

$9,700

Added

Increase in liabilities means the cash is with the organization and not given at present. Hence c

Income taxes payable

$15,100

Added

Sale of equipment

$8,300

Deducted

Since Sale of Equipment is a investing activity and net income is calculated after adjusting gain or loss. Due to gain net income figure is excessive by gain amount. Hence deducted to find out correct operating cash flow

Sale of long tem investments

$12,300

Added

Losses are treated as expenses in income statement and net income is calculated after duducting losses. Since it is a investing activity, the loss is added back to net income to find out correct operating income.

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Item

Amount

Effect

Explanation

Accounts Receivable

$79,000

Added

Decrease in Accounts Receivable is added back to Net Income. Logic behind this is Decrease shows the realization of Cash from the customer hence the cash is increased

Inventory

$112,000

Deducted

Increase in Inventory means the inventories are purchased and lying in stock. It means Cash is spent on purchase of inventory. Hence deducted from net Income

Prepaid Expenses

$3,900

Added

Claim in current year. hence decrease shows the realization or expensesd in the current year.

Accounts Payables

$47,000

Deducted

Decrease means the Accounts Payable are paid in this yea/ Cash given. Hence deducted.

Accrued Liabilities

$9,700

Added

Increase in liabilities means the cash is with the organization and not given at present. Hence c

Income taxes payable

$15,100

Added

Sale of equipment

$8,300

Deducted

Since Sale of Equipment is a investing activity and net income is calculated after adjusting gain or loss. Due to gain net income figure is excessive by gain amount. Hence deducted to find out correct operating cash flow

Sale of long tem investments

$12,300

Added

Losses are treated as expenses in income statement and net income is calculated after duducting losses. Since it is a investing activity, the loss is added back to net income to find out correct operating income.

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