Question

From the following balances you are required to calculate cash from operating activities.

Name of accounts	December31, 2015	December 31, 2016
Notes receivable	SR   7,800	SR   12,000
Notes payable	SR 22,000	SR 16,000
Accounts receivable	SR 49,000	SR 46,000
Furniture	SR 30,000	SR 38,000
Accounts payable	SR   30,000	SR 35,000
Advance Rent received	SR    9,000	SR    5,600
Prepaid expenses	SR    5,700	SR    4,200
Depreciation on Plant assets	SR 36,000	SR 45,000
Net Income during the year	-----	SR 160,000

Answer 1

The following tables show the calculation of net operating cash flow

Workings:

In the first table, all the changes in the assets/ liabilities are shown which indicates that the differences are the transactions of current year 2016

In Indirect method of cash flow, we calculate the cash flow from operating expenses using net income reported during the year.

Depreciation is added back to the income, as it is a non cash expense in the income statement, i.e., while calculating net income depreciation of 9000 is reduced from the income, but as it does not involve any cash outflow, it is added back in the cash flow statement.

There is an increase in furniture of 8000, that indicates a purchase has been made, but the purchase of fixed assets do not affect the operating income, even though it affects the cash flow. It does not relate to operating activity , it is related to investing activities, hence ignored in the above cash flow from operating activities.

Prepaid expenses are decreased by 1500, indicating that an expense of 1500 is debited to income statement, but there is no cash outflow, as it is paid in earlier years. There is no cash outflow of 1500 in current year, hence added back to operating income.

Advance rent received is decreased by 3400, indicating that an income of 3400 is credited to income statement, but there is no cash inflow, as it is received in earlier years. There is no cash inflow of 3400 in current year, hence deducted from operating income.

In general, if asset increases(asset purchased) there is a cash outflow, if asset decreases(asset sold) there is a cash inflow

Similarly , if liability increases(borrowed money) there is a cash inflow, if liability decreases (liability paid), there is a cash outflow.

Any decrease in receivables indicate that the amount is received from them, i.e., cash inflow . Similarly any increase in receivables indicate cash outflow.

In this case accounts receivable is decreased by 3000, which is a cash inflow , hence added to operating income.

Notes receivable is increased by 4200, similar to cash outflow, hence deducted.

Any decrease in payables indicate that the amount is paid to them, i.e., cash outflow . Similarly any increase in Payables indicate cash inflow.

In this case accounts payable is increased by 5000, which is similar to cash inflow, hence added to operating income

Notes payable is decreased by 6000, indicating cash outflow, hence deducted from operating income.