Question

Cash Flows from Operating Activities—Indirect Method

The net income reported on the income statement for the current year was $126,900. Depreciation recorded on store equipment for the year amounted to $20,900. 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	$48,220		$44,360
Accounts receivable (net)	34,570		32,780
Merchandise inventory	47,210		49,910
Prepaid expenses	5,300		4,210
Accounts payable (merchandise creditors)	45,180		41,960
Wages payable	24,690		27,410

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 .

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Answer 1

Solution a:

Statement of Cash Flows (Partial)
Particulars	Details	Amount
Cash Flow from Operating Activities:
Net Income		$1,26,900.00
Adjustments to reconcile net income to cash flow from operating activities:
Depreciation expense	$20,900.00
Changes in Current Operating Assets and liabilities:
Increase in Accounts Receivables ($32780-$34570)	-$1,790.00
Decrease in Inventory ($49910-$47210)	$2,700.00
Increase in Prepaid Expenses ($4210-$5300)	-$1,090.00
Increase In Accounts Payable ($45180-$41960)	$3,220.00
Decrease in Wages Payable ($24690-$27410)	-$2,720.00
Total Adjustments		$21,220.00
Net Cash Flow From Operating Activities		$1,48,120.00

Solution b:

Cash flows from operating activities differs from net income because it does not use the Accrual basis of accounting. For example revenues are recorded on the income statement when they are earned.