Question

1.

Cash Flows from Operating Activities—Indirect Method

The net income reported on the income statement for the current year was $118,900. Depreciation recorded on store equipment for the year amounted to $19,600. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows:

	End of Year		Beginning of Year
Cash	$45,900		$42,230
Accounts receivable (net)	32,910		31,210
Merchandise inventory	44,940		47,510
Prepaid expenses	5,050		4,010
Accounts payable (merchandise creditors)	43,010		39,950
Wages payable	23,500		26,100

a. Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method. Use the minus sign to indicate cash outflows, cash payments, decreases in cash, or any negative adjustments.

Statement of Cash Flows (partial)
Cash flows from operating activities:
	$
Adjustments to reconcile net income to net cash flow from operating activities:
Changes in current operating assets and liabilities:
Net cash flow from operating activities		$

b. Cash flows from operating activities differs from net income because it does not use the _____ of accounting. For example revenues are recorded on the income statement when______ .

2.

Reporting Land Transactions on Statement of Cash Flows

On the basis of the details of the following fixed asset account, indicate the items to be reported on the statement of cash flows:

ACCOUNT Land									ACCOUNT NO.
									Balance
Date			Item		Debit		Credit		Debit		Credit
Jan.	1			Balance					834,000
Mar.	12			Purchased for cash	284,000				1,118,000
Oct.	4			Sold for $155,000			133,000		985,000

Item	Section of Statement of Cash Flows	Added or Deducted	Amount
Mar. 12: Purchase of fixed asset			$
Oct. 4: Sale of fixed asset			$
Gain on sale of fixed asset (assume the indirect method)			$

Answer 1

Requirement:1
A)

Statement of Cash Flow [Indirect Method] [Partial]
Cash flows from operating activities:
Net Income		$       118,900
Adjustments to reconcile net income to operating cash flow
Depreciation expense	$      19,600
Changes in operating assets and liabilities:
Increase in Account Receivables [31210-32910]	$      (1,700)
Decrease in Merchandise Inventory [47510-44940]	$        2,570
Increase in Prepaid Expenses [4010-5050]	$      (1,040)
Increase in accounts payable [43010-39950]	$        3,060
Decrease in wages payable [23500-26100]	$      (2,600)	$         19,890
Net cash flows from operating activities		$       138,790

B)

Cash flows from operating activities differs from net income because it does not use the Accrual Method / Accrual Basis of accounting. For example revenues are recorded on the income statement when Accrued / Earned.

Requirement:2

Item	Section of Statement of Cash Flows	Added or Deducted	Amount
Mar. 12: Purchase of fixed asset	Investing Activity	Deducted	$       (284,000)
Oct. 4: Sale of fixed asset	Investing Activity	Added	$          155,000
Gain on sale of fixed asset [assume the indirect method] [155000-133000]	Operating Activity	Deducted	$ (22,000)