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ll. Cash Flow Statement-indirect method (25%) Shown below is information from the financial statements of Chapin Company for 2018 Beginning End of Year of Year 98,000 Accounts receivable nventory Prepaid expenses 106,000 $120,000 105,000 31,000 74,000 9,000 Accounts payable (for merchandise) Accrued liabilities Net sales 70,000 $28,000 30,000 8,000 t of goods sold Expenses (including depreciation of $43,000) 18,000 58,000 (a) On the basis of the above information, prepare a partial statement of cash lows, showing the computation of net cash flows from operating activities by the indirect method. (b) Explain why net income is different from the net cash provided by operations.
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Income Statement Sales Cost of Goods Sold Expenses Net Income 848,000 318,000 258,000 576,000 272,000 Statement of cash Flow Amount Cash Flows from Operating Activities Net Income Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities 272,000 From Above Depreciation Expense Increase in Accounts Payable Increase in Accrued Liabilities Increase in Accounts Receivable Decrease in Merchandise Inventories Increase in prepaid expenses Cash generated from operation:s 43,000 4.000 2,000 8,000 15,000 2,000 54,000 326,000 Net Cash Provided by Operating Activities The function of the income statement is to measure the profitability of the enterprise for a given period. This is done by matching expenses and losses with the revenues and gains earned. While no other statement measures profitability as well as the income statement, it does not show the timing of cash flows and the effect of operations on liquidity and solvency. The latter is reported on by the Statement of Cash Flows. Cash from operations reflects a broader concept of operations relative to net income. It encompasses all earning related activities of the enterprise. The investor is concerned not only with expenses and revenues but also with the cash demands of these activities, such as investments in customer receivables and in inventories as well as the financing provided by suppliers of goods and services. While fragmentary information on the sources and uses of cash can be obtained from comparative balance sheets and from income statements, a comprehensive picture of this important area of activity can be gained only from a statement of cash flows (SCF). The SCF provides information to help answer questions such as: What amount of cash is generated by operations? What utilization is made of cash provided by operations? What is the source of cash invested in new plant and equipment? What use is made of cash from a new bond issue or the issuance of common stock? How is it possible to continue the regular dividend in the face of an operating loss? How is debt repayment achieved? What is the source of cash used to redeem the preferred stock? How is the increase in investments financed? Why, despite record profits, is the cash position lower than last year? It also can highlight more clearly the distinction between net income and cash provided by operations. The ability of an enterprise to generate cash from operations on a consistent basis is an important indicator of financial health. No business can survive over the long run without generating cash from its operations

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