Question

Cash Flows from Operating Activities—Indirect Method

The net income reported on the income statement for the current year was $138,100. Depreciation recorded on store equipment for the year amounted to $22,800. 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	$54,000		$49,680
Accounts receivable (net)	38,720		36,710
Merchandise inventory	52,870		55,890
Prepaid expenses	5,940		4,720
Accounts payable (merchandise creditors)	50,600		47,000
Wages payable	27,650		30,700

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

a) Statement

Cash flow from operating activities
Net income	138100
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation expense	22800
Changes in current operating assets and liabilities:
Increase account receivable	-2010
Decrease inventory	3020
Increase prepaid expense	-1220
Increase Accounts payable (merchandise creditors)	3600
Decrease wages payable	-3050
Net cash flow from operating activities	161240

b. 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 goods is sold