Question

1. The income statement disclosed the following items for the year:

   Depreciation expense	$65,000
   Gain on disposal of equipment	27,500
   Net income	620,000

   The changes in the current asset and liability accounts for the year are as follows:

   	Increase (Decrease)
   Accounts receivable	$11,200
   Inventory	(6,350)
   Prepaid insurance	(1,200)
   Accounts payable	(4,200)
   Income taxes payable	1,650
   Dividends payable	2,500

   a. Prepare the Cash Flows from Operating Activities section of the A summary of the cash receipts and cash payments for a specific period of time, such as a month or a year.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)
   For the year ended Dec. 31, --
   Cash flows from operating activities:
   Depreciation expense Increase in income taxes payable Increase in inventories Net income	$
   Adjustments to reconcile net income to net cash flow from operating activities:
   Decrease in accounts receivable Depreciation expense Increase in accounts receivable Loss on disposal of equipment
   Decrease in prepaid insurance Gain on disposal of equipment Increase in accounts receivable Loss on disposal of equipment
   Changes in current operating assets and liabilities:
   Decrease in income taxes payable Depreciation expense Increase in accounts receivable Increase in inventory
   Decrease in accounts receivable Decrease in inventory Increase in inventory Increase in prepaid insurance
   Decrease in accounts receivable Decrease in prepaid insurance Gain on disposal of equipment Increase in prepaid insurance
   Decrease in accounts payable Decrease in income taxes payable Depreciation expense Increase in accounts payable
   Decrease in accounts receivable Decrease in income taxes payable Increase in income taxes payable Increase in prepaid insurance
   Net cash flow from operating activities		$

   b. Why is net cash flows from operating activities different than net income?

   Cash flows from operating activities is based on

   • accrual basis
   • cash basis
   • tax basis
   of accounting, whereas net income is computed using
   • accrual basis
   • cash basis
   • tax basis
   of accounting

Answer 1

Cash flow from Operating activities	Amount(in $)
Net Income	6,20,000
Add:Depreciation expenses	65,000
Less:Gain on sale of equipment	(27,500)
Cash flow before adjustment of working capital items	6,57,500
Less:Increase in Accounts Receivable	(11,200)
Add:Decrease in Inventory	6,350
Add:Decrease in Prepaid insurance	1,200
Less:Decrease in Accounts payable	(4,200)
Add:Increase in income taxes payable	1,650
Add:Increase in Dividends payable	2,500
Net Cash flow from Operating activities	6,53,800
Cash flow from Operating activities is prepared on cash basis whereas Net Income is prepared on Accrual basis