Question

Statement of Cash Flows—Indirect Method

The income statement for Astro Inc. for 2017 is as follows:

	For the Year Ended December 31, 2017

Sales revenue	$500,000
Cost of goods sold	400,000
Gross profit	$100,000
Operating expenses	180,000
Loss before interest and taxes	$(80,000)
Interest expense	20,000
Net loss	$(100,000)

Presented here are comparative balance sheets:

	December 31
	2017		2016
Cash	$95,000		$80,000
Accounts receivable	50,000		75,000
Inventory	100,000		150,000
Prepayments	55,000		45,000
Total current assets	$300,000		$350,000
Land	$475,000		$400,000
Plant and equipment	870,000		800,000
Accumulated depreciation	(370,000)		(300,000)
Total long-term assets	$975,000		$900,000
Total assets	$1,275,000		$1,250,000
Accounts payable	$125,000		$100,000
Other accrued liabilities	35,000		45,000
Interest payable	15,000		10,000
Total current liabilities	$175,000		$155,000
Long-term bank loan payable	$340,000		$250,000
Common stock	$450,000		$400,000
Retained earnings	310,000		445,000
Total stockholders' equity	$760,000		$845,000
Total liabilities and stockholders' equity	$1,275,000		$1,250,000

Other information is as follows:

Dividends of $35,000 were declared and paid during the year.

Operating expenses include $70,000 of depreciation.

Land and plant and equipment were acquired for cash, and additional stock was issued for cash. Cash also was received from additional bank loans.

The president has asked you some questions about the year's results. He is disturbed with the $100,000 net loss for the year. He notes, however, that the cash position at the end of the year is improved. He is confused about what appear to be conflicting signals: "How could we have possibly added to our bank accounts during such a terrible year of operations?"

Required:

1. Prepare a statement of cash flows for 2017 using the indirect method in the Operating Activities section. Use the minus sign to indicate net loss, cash payments, cash outflows, or decreases in cash.

Astro Inc.
Statement of Cash Flows
For the Year Ended December 31, 2017
Cash Flows from Operating Activities
	$
Adjustments to reconcile net income to net cash provided by operating activities:
	$
	$
Cash Flows from Investing Activities
	$
	$
Cash Flows from Financing Activities
	$
	$
	$
Cash balance, December 31, 2016
Cash balance, December 31, 2017	$

2. Despite a net loss for the year, Astro was able to increase its cash at the end of the year

     

     Astro can increase its net profits by

     

Answer 1

Required: Statement of cash flows for 2017 using the indirect method in the Operating Activities section only

Solution:

	Amount in $
Cash flow from operating activities:
Net loss as per income statement	-1,00,000
Add: Non cash items of income statement
Depreciation	70,000
Add: Items of Financing activities
Interest	20,000
Adjustment for changes in working capital
Account receivables	25,000
Prepayments	-10,000
Inventory	50,000
Accounts payables	25,000
Other accrured liabilities	-10,000
Net cash inflow from operating activities before tax	70,000
Less: Tax paid if any	-
Net cash inflow from operating activities after tax	70,000

As above the statement of cash flow showing net cash inflow from operating activities is $70,000.