Question

Suppose your company's income statement reports $105 of net income, and its comparative balance sheet indicates the following. Dec 31, 2017 $ 35 Dec 31, 2018 $ 205 175 Cash Accounts receivable Inventory Total 75 260 $ 370 135 $ 515 $ 50 100 Wages payable Common shares Retained earnings Total $ 10 100 260 $ 370 365 $ 515 Requirements: 1. Prepare the operating activities section of the statement of cash flows, using the indirect method, and reconcile it to the opening and closing cash balance. 2. Identify the most significant cause of the difference between the company's net income and net cash flow from operating activities.

Answer 1

105 Cashflow Statement as at 31st December 2002 using Indirect method :- Particulars Amount $ Amount $ Cash Flows From Operating Activities: Net Income Adjustments to Reconcile Net Income to Net Cash Provided by operations :- Add: Depreciation Expense Changes in Working Capital:- Less: Increase in Accounts receivable (100) Add: Decrease in Inventory 125 Add: Increase in Accounts Payable 40 65 Net cash provided by Operating Activities 170 Cash Flows From Investing Activities: Net cash provided by Investing Activities Cash Flows From Financing Net cash provided by Financing Activities Net Changes in Cashflow from all activities Cash at the beginning of the year Cash at the end of the year 205 Most important difference between net income and net cashf flow from operating activities is "Decrease in Inventory". Decrease in inventory indicates that the Cost of Goods Sold was $110 more than the cash paid to purchase Inventory. Company sold Inventory but did not replace it, creating a net cash inflow for the period.