Question

The income statement disclosed the following items for 2016:

Depreciation expense	$65,140
Gain on disposal of equipment	29,350
Net income	408,700

Balances of the current assets and current liability accounts changed between December 31, 2015, and December 31, 2016, as follows:

	Increase (Decrease)
Accounts receivable	$8,540
Inventory	(4,200)
Prepaid insurance	(1,600)
Accounts payable	(6,220)
Income taxes payable	1,620
Dividends payable	2,270

Required:

A.

Prepare the Cash Flows from Operating Activities section of the statement of cash flows A summary of the cash receipts and cash payments for a specific period of time, such as a month or a year. , 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 flows from operating activities is different than net income.

Answer 1

Solution A:

Statement of Cash Flows - Partial (Indirect Method)
For year ended December 31, 2016
Particulars	Details	Amount
Cash Flow from Operating Activities:
Net Income	$408,700.00
Adjustments to reconcile net income to net cash provided by operations:
Depreciation Expense	$65,140.00
Gain on disposal of equipment	-$29,350.00
Increase in accounts receivables	-$8,540.00
Decrease in inventory	$4,200.00
Decrease in Prepaid insurance	$1,600.00
Decrease in accounts payable	-$6,220.00
Increase in income tax payable	$1,620.00
Net Cash provided by operating activities		$437,150.00

Solution B:

There reason that net cash flows from operating activities are different than net income are as under:

1. Cash flow from operating activities represent cash received and used in operation while net income is computed on accurual basis of accounting. In accural method of accounting, all income and expenses are recoganized in the year in which they are earned /incurred irrespective of cash received or not. Therefore net income will differ from cash flow from operating activities.

2. There are non cash expense like depreciation, amortization, impariment etc which are charged to income statement in computing net income, though these expense are not incurred in cash, therefore cash from operating activities differs net income.

3. Net Income includes income related to gain/loss on sale of investment / fixed assets. These are part of investing activities in statement of cash flows. Hence net income will differ from cash from operating activities.