Question

Question 6 Indirect Statement of Cash flows Question Partial List of Accounts (use only this information) Ending Balance Accounts Receivable 31,000 Salaries Payable 27,000 Beginning Balance 27,000 15,000 Other Information: Net Income 62,000 Sales 150,000 Salary Expense 20,000 Depreciation Expense 17,000 What is the second number in the cash flows from operating activities (indirect method)? Second Number =>

Answer 1

Statement of cash flows is prepared for a reporting period for analyzing reasons for change in cash balance between two reporting periods. It is broadly categorised into operating activities, investing activities and the financing activities. Out of the three, operating activities block specifically helps to analyze reason for change in cash balance due to operating activities of the business. There are two methods to prepare operating activities block such as direct and indirect method. Under direct method, operating activities block contains data of cash received from sale of goods or services and cash paid to suppliers, vendors for services, interest expense and income taxes. It means that non-cash incomes or expenses and net income reported for the period are not considered under direct method while preparing the statement of cash flows. Data for operating activities are traced from both income statement & working capital block of the balance sheet. For example, --> Depreciation expense: It is a non-cash expense that would have decreased net income. So, it shall be added back to net income to calculate net cash flow from operating activities. --> Increase in current asset or decrease in current liability would have increased working capital requirement. So, it shall be deducted from net income to calculate net cash flow from operating activities. --> Decrease in current asset or increase in current liability would have decreased working capital requirement. So, it shall be added to net income to calculate net cash flow from operating activities.

Net Income Add back Depreciation Expense Cash Basis Adjusted Net Income Less: Increase in Accounts Receivable Add: Increase in Salaries Payable Net cash flow from operating activities 62,000 17,000 79,000 -4,000 (31,000 - 27,000; Current assets increased and so deducted] 12,000 (27,000 - 15,000; Current liabilities increased and so added] 87,000 Therefore, second letter in net cash flow from operating activities is 7. (Second letter in 87,000)