Question

The net income reported on the income statement for the current year was $318,700. Depreciation recorded on equipment and a building amounted to $93,980 for the year. 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	$90,370	$95,280
Accounts receivable (net)	111,660	118,570
Inventories	232,780	203,250
Prepaid expenses	12,000	15,310
Accounts payable (merchandise creditors)	96,420	104,940
Salaries payable	15,310	13,420

Required:

A.	Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries. Use the minus sign to indicate cash outflows, cash payments, decreases in cash and for any adjustments, if required.
B.	If the direct method had been used, would the net cash flow from operating activities have been the same?

Answer 1

A. Cash flow from operating activities using indirect method is as under:
Adjustments to reconcile net income to net cash flow from operating activities
Depreciation on equipment and Building		$ 93,980
Changes in current operating assets and liabilities:
Decrease in accounts receivables		$ 6,910
Increase of inventories		$ (29,530)
Decrease in prepaid expenses		$ 3,310
Decrease in accounts payable		$ (8,520)
Increase in salaries payable		$ 1,890
Net cash flow from operating activities			$ 68,040
Net income			$ 318,700
Net cash used for operating activities			$ 386,740
Changes in current operating assets and liabilities:
	Beginning year	End of the year	Increase/(Decrease) in assets and liabilities
Accounts Receivables	118570	111660	6910
Inventories	203250	232780	-29530
Prepaid expenses	15310	12000	3310
Accounts payable	104940	96420	8520
Salaries payable	13420	15310	-1890

B. the net cash flow from operating activities under direct method would be same as the net cash flow from operating activities under indirect method. Both the methods shows the correct picture of cash flow from operating activities.