Question

E 4-15 Indirect method; reconciliation of net income to net cash flows from operating activities L04-8 The accounting records of Hampton Company provided the data below (S in thousands). $ 17.300 Net income Depreciation expense Increase in accounts receivable 7.800 4.000 5.500 Decrease in inventory Decrease in prepaid insurance Decrease in salaries payable Increase in interest payable 1.200 2,700 800 Required: Prepare a reconciliation of net income to net cash flows from operating activities.

Answer 1

1) Assumption : If Interest Payable is considered to be Operating Activity (Refer Note 1)
Cash flow from operating activities:	Amount in $	Amount in $
Net Income		17,300
Adjustments to reconcile loss before tax to net cash flows
Depreciation Expense		7,800
Operating profit before working capital changes		25,100
Movement in working capital:
(Decrease) in Salaries Payable	-2,700
Increase in Interest Payable	800		Note 1
(Increase) in accounts receivables	-4,000
Decrease in inventories	5,500
Decrease in Prepaid Expenses	1,200
Movement in working capital:		800
Net cash generated from/(used in ) operating activities		25,900
Note 1
Please note : If Interest Payable is considered to be Finanacing Activity then Interest Expenses has to be added Adjustments to reconcile net income to net cash flows, But in the information provided no such information is provided. If interest expense information is given then add back interest expense (just like depreciation) and consider Interest Payable is considered to be Financing Activity.
2) Assumption : If Interest Payable is considered to be Financing Activity (Refer Note 1)
Cash flow from operating activities:	Amount in $	Amount in $
Net Income		17,300
Adjustments to reconcile net income to net cash flows
Depreciation Expense		7,800
Operating profit before working capital changes		25,100
Movement in working capital:
(Decrease) in Salaries Payable	-2,700
Increase in Interest Payable	-
(Increase) in accounts receivables	-4,000
Decrease in inventories	5,500
Decrease in Prepaid Expenses	1,200
Movement in working capital:		-
Net cash generated from/(used in ) operating activities		25,100