Question

Mark Heath has completed the basic format to be used in preparing the statement of cash flows (indirect method) for ABC Consultants. ABC Consultants Statement of Cash Flows For the Year Ended December 31, 2017 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash flows from operating activities: Net cash flows from operating activities Cash Flows from Investing Activities Net cash flows from investing activities Cash Flows from Financing Activities Net cash flows from financing activities Net increase (decrease) in cash (50,000) Cash at the beginning of the period 95,000 Cash at the end of the period $45,000 Listed below in random order are line items to be included in the statement of cash flows. Purchase of equipment $220,000 Increase in inventory 30,000 Increase in prepaid rent 10,000 Payment of dividends 40,000 Depreciation expense 20,000 Increase in accounts receivable 60,000 Increase in accounts payable 10,000 Loss on sale of land 7,000 Net income 70,000 Repayment of notes payable 50,000 Cash received from the sale of land 3,000 Issuance of common stock 250,000 Required: Prepare the statement of cash flows for ABC Consultants using the indirect method (12 points). ~~

Answer 1

ABC CONSULTANTS
Cash Flow Statement
For year ended 31st December 2017
A. Cash Flows from Operating Activity
Net Income		$      70,000.00
Adjustments to reconcile net income to net cash flows from operating activities
Depreciation expense	$      20,000.00
Increase in Accounts receivables	$    (60,000.00)
Increase in Accounts payables	$      10,000.00
Increase in Inventory	$    (30,000.00)
Increase In Prepaid Rent	$    (10,000.00)
Loss on sale of Land	$        7,000.00
		$    (63,000.00)
Net cash flows from Operating activities		$        7,000.00
B. Cash flows from Investing Activities
Purchase of equipments	$ (220,000.00)
Cash received from sale of Land	$        3,000.00
Net Cash flows from Investing activities		$ (217,000.00)
C. Cash Flows from Financing activities
Issuance of Common Stock	$    250,000.00
Repayment of Notes payable	$    (50,000.00)
payments of dividends	$    (40,000.00)
Cash flows from Financing activities		$    160,000.00
Net Increase (Decrease) in Cash [A+B+C]		$    (50,000.00)
Cash at the beginning of the period		$      95,000.00
Cash at the end of the period		$      45,000.00

*Amounts in brackets represent negative amounts.

General Points related to preparation of cash flow

Depreciation and amortization expenses are non cash Expense that is why it is added back to Operating profit to calculated cash generated from operations.

When Current asset Increase or Current Liability Decrease this means that cash is used.

When Current asset Decrease or Current Liability Increase this means that cash has been saved and hence added to cash from Operations. Issue of shares increase cash unless issue is for consideration other than cash such as in exchange of fixed assets.

Loss on sale of any asset is a non operating expense and hence added to net income to calculated operating cash. Actual cash received on sale of asset is shown in Investing section of Cash flow.