Question

Cash Flows from Operating Activities—Indirect Method

The net income reported on the income statement for the current year was $139,400. Depreciation recorded on store equipment for the year amounted to $23,000. 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	$56,460		$51,940
Accounts receivable (net)	40,480		38,380
Merchandise inventory	55,270		58,430
Prepaid expenses	6,210		4,930
Accounts payable (merchandise creditors)	52,900		49,140
Wages payable	28,910		32,100

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:
Net income	$
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation
Changes in current operating assets and liabilities:
Increase in accounts receivable
Decrease in merchandise inventory
Increase in prepaid expenses
Increase in accounts payable
Decrease in wages payable
Net cash flow from operating activities		$

b. Cash flows from operating activities differs from net income because it does not use the cash basis  of accounting. For example revenues are recorded on the income statement when cash is received .

Answer 1