Question

Suppose the income statement for Goggle Company reports $175 of net income, after deducting depreciation of $15. The company bought equipment costing $160 and obtained a long-term bank loan for $164. The company’s comparative balance sheet, at December 31, is presented here. Required: 1. Calculate the change in each balance sheet account and indicate whether each account relates to operating, investing, and/or financing activities (+ for increase and − for decrease). 2. Prepare a statement of cash flows using the indirect method. 6. Are the cash flows typical of a start-up, healthy, or troubled company?

Answer 1

Ans.: What is Indirect Method of Cash Flow: Under the Indirect Method of Cash Flow Preparation, the adjustment in Net Income with changes in Balance Sheet accounts to arrive at the amount of cash generated by operating activities. In preparation of Cash Flow, Cash flows are divided into the following 3 classifications-

1. Cash Flow from Operating Activities;

2. Cash Flow from Investing Activities; &

3. Cash Flow from Financing Activities.

Let's examine the Cash flow from given transaction in case-

1. Cash Flow from Operating Activities= Net Income + Depreciation=$175+$15=$190. Here this is increase (+) for cash flow.

2. Cash Flow from Investing Activities= Purchase of Equipment bought for $160. Here is decrease (-) for cash flow.

3. Cash Flow from Financing Activities= Borrowing long term loan for $164. Here is increase (+) for cash flow.

Let's Prepare Cash flow Statement

Cash Flow Statement	Amount	Amount
Cash Flow from Operating Activity:
Net Income		$175
Add: Depreciation	$15	$15
Cash Flow from Investing Activities
Purchase of Equipment		($160)
Cash Flow from Financing Activities
Borrowing of Long-Term Loan from Bank		$164
Net Increase in Cash		$194

2. It's Health Cashflow and not of Start-up. As if it is of Cash flow, there would have Cash Burn not earn. But here it is earn for $194.