Question

Little Ricky's Village People Shop Inc.'s income statement for the year ending 12/31/18 showed that the company had a net loss of ($35,000). Is it still possible for Little Ricky's to have had a net cash inflow from operating activities for the year when using the indirect method for its cash flow statement? Explain your answer and give two examples (with numbers you make up) to support your argument. Use complete sentences.

Answer 1

Solution

Little Ricky’s Village People Shop Inc

Answer and explanation:

Yes, it is possible for Little Ricky’s to have had a net cash inflow from operating activities for the year when using the indirect method for its cash flow statement.

The net loss of $35,000 can still result in a net cash inflow from operating activities.

Assuming the company has a depreciation expense of $45,000 for the year 2018.

Another assumption would be loss on sale of equipment. Assuming loss on sale of equipment as $15,000, we compute the net cash inflow from operations using the indirect method;

Little Village People Shop Inc
Cash Flow Statement (Partial)
(Indirect Method)
For the Year Ended December 31, 2018
Net Loss		($35,000)
Adjustments to reconcile net loss to net cash flow from operations:
depreciation expense	$45,000
Loss on sale of equipment	$15,000	$60,000
cash flow from operations		$25,000

Notes:

The income statement reports all revenues and expenses. The revenues would comprise incomes the company might have earned but sometimes might have not been received. Also included in revenues would be the gain on sale of assets.

Likewise, the expenses would include all accrued expenses, though some might have been unpaid. Also included in expenses are the losses on sale of assets. Hence, the effect of these items would reflect as either net income or net loss. But net income does not necessarily always indicate adequate cash inflow, while net loss does not always indicate shortage of cash inflow.