Question

The following information is available for Larkspur Corporation for the year ended December 31, 2022.

Beginning cash balance $40,000

Accounts payable decrease 3,200

Depreciation expense 84,000

Accounts receivable increase 9,400

Inventory increase 12,300

Net income 257,000

Cash received for sale of land at book value 40,000

Sales revenue 745,000

Cash dividends paid 11,900

Income tax payable increase 4,000

Cash used to purchase building 140,500

Cash used to purchase treasury stock 30,100

Cash received from issuing bonds 269,000

Prepare a statement of cash flows using the indirect method.

Answer 1

In calculating the cash flows statement from indirect method, we will start with the net income. We will add back the non cash item of depreciation in it. Then we will adjust the amount for increase or decrease in cash due to increase or decrease in current assets or current liabilities.Like, an increase in current assets will reduce cash, so we will deduct it and a decrease in current assets will increase cash, so we will add it. Similarly, an increase in current liabilities will increase cash, so it will be added and a decrease in current liabilities will reduce cash, so it will be deducted.  

Cash flow statement for year ended December 31, 2022:

Description	Amount	Amount
Operating activities:
Net income	$257000
Adjustments to reconcile net income to net cash from operating activities
Add: Depreciation expense	$84000
Less: Decrease in accounts payable	($3200)
Less: Increase in accounts receivable	($9400)
Less: Increase in inventory	($12300)
Add: Income tax payable increase	$4000
Net cash flows from operating activities		$320100
Investing activities:
Buildings purchased	($140500)
Cash received from sale of land	$40000
Net cash flows from investing activities		($100500)
Financing activities:
Dividends paid	($11900)
Treasury stock purchased	($30100)
Proceeds from bond issue	$269000
Net cash flows from financing activities		$227000
Net change in cash		$446600
Beginning cash balance		$40000
Ending cash balance		$486600