Question

The net income reported on the income statement for the current year was $437,000. Depreciation recorded on store equipment for the year amounted to $17,400. 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	$40,680	$37,320
Accounts receivable (net)	31,350	27,460
Inventories	40,160	43,640
Prepaid expenses	3,440	4,710
Accounts payable (merchandise creditors)	40,780	37,480
Wages payable	20,890	24,530

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. Briefly explain why net cash flow from operating activities is different than net income. 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. Question not attempted. Score: 0/77 Statement of Cash Flows (partial) 1 Cash flows from operating activities: 2 3 Adjustments to reconcile net income to net cash flow from operating activities: 4 5 Changes in current operating assets and liabilities: 6 7 8 9 10 11

Answer 1

• All working forms part of the answer
• Requirement ‘a’

1	Cash flows from operating activities:
2	Net Income		$ 4,37,000.00
3	Adjustments to reconcile net income to net cash flow from operating activities:
4	Depreciation expense		$     17,400.00
5	Changes in current operating assets and liabilities:
6	Increase in Accounts receivables	$                 (3,890.00)
7	Decrease in Inventories	$                   3,480.00
8	Decrease in Prepaid expenses	$                   1,270.00
9	Increase in Accounts payable	$                   3,300.00
10	Decrease in Wages payable	$                 (3,640.00)	$           520.00
11	Net Cash Flows from operating activities		$ 4,54,920.00

• Requirement ‘b’

Net Cash flow from Operating activities is different than net income mainly because net income calculation includes Non-Cash items (like depreciation expense) and revenues and expenses recorded on accrual basis, while net cash flow from operating activities is calculated to find the ‘actual cash flows’.