Question

1. Cash Flows from Operating Activities—Indirect Method

   The net income reported on the income statement for the current year was $139,000. Depreciation recorded on store equipment for the year amounted to $22,900. 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	$55,600		$51,150
   Accounts receivable (net)	39,870		37,800
   Inventories	54,430		57,540
   Prepaid expenses	6,120		4,860
   Accounts payable (merchandise creditors)	52,100		48,390
   Wages payable	28,470		31,610

   a. Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method. Use the minus sign to indicate cash out flows, cash payments, decreases in cash, or any negative adjustments.

   Statement of Cash Flows (partial)
   Cash flows from operating activities:
   	$
   Adjustments to reconcile net income to net cash flow from operating activities:
   Changes in current operating assets and liabilities:
   Net cash flow from operating activities		$

   b. Cash flows from operating activities differs from net income because it does not use the of accounting. For example revenues are recorded on the income statement when .

Answer 1

Cash flow statement (partial)
Indirect method
Cash flow from operating activity
	Amount $	Amount $
Net income		139000
Adjustments to reconcile net income to net cash flow from operating activities
Depreciation	22900
Changes in current operating assets and liabilities
Increase in accounts receivable(39870-37800)	-2070
Decrease in merchandise inventory (54430-57540)	3110
Increase in prepaid expenses (6120-4860)	-1260
Increase in wages payable (28470-31610)	-3140
Increases and decreases in the current asset/liability accounts over the period.		19540
Cash flow from operating activity		158540

Cash flow from operating activity =$158540

2.Cash flows from operating activities differs from net income because it does not use the Accrual basis of accounting. For example revenues are recorded on the income statement when .