Question

Cash Flows from Operating Activities—Indirect Method

The net income reported on the income statement for the current year was $146,000. Depreciation recorded on store equipment for the year amounted to $24,100. 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	$59,420		$54,070
Accounts receivable (net)	42,600		39,960
Merchandise inventory	58,170		60,830
Prepaid expenses	6,540		5,140
Accounts payable (merchandise creditors)	55,680		51,150
Wages payable	30,420		33,420

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 outflows, 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

Solution

Statement of Cash Flows (partial)
Cash flows from operating activities:
Net Income	$146,000.00
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation expense	$ 24,100.00
Changes in current operating assets and liabilities:
Increase in accounts receivable	$   (2,640.00)
Decrease in Merchandise inventory	$    2,660.00
Increase in Prepaid expenses	$   (1,400.00)
Increase in Accounts payable	$    4,530.00
Decrease in Wages payable	$   (3,000.00)
Net cash flow from operating activities		$170,250.00

.

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