Changes in Current Operating Assets and Liabilities—Indirect MethodMohammed Corporation's comparative balance sheet for current assets and liabilities was as follows: Dec. 31, Year 2Dec. 31, Year 1Accounts receivable$22,400 $18,500 Inventory66,900 77,800 Accounts payable30,400 26,400 Dividends payable22,000 20,000 Adjust net income of $89,300 for changes in operating assets and liabilities to arrive at net cash flow from operating activities.$

Question
Asked Nov 17, 2019
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Changes in Current Operating Assets and Liabilities—Indirect Method

Mohammed Corporation's comparative balance sheet for current assets and liabilities was as follows:

  Dec. 31, Year 2 Dec. 31, Year 1
Accounts receivable $22,400   $18,500  
Inventory 66,900   77,800  
Accounts payable 30,400   26,400  
Dividends payable 22,000   20,000  

Adjust net income of $89,300 for changes in operating assets and liabilities to arrive at net cash flow from operating activities.
$

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Expert Answer

Step 1
Statement of cash flows: It is one of the financial statement that shows
the cash and cash equivalents of a company for a particular period. It
determines the net changes in cash through reporting the sources and
uses of cash due to the operating, investing, and financing activities of a
company
Indirect method: Under this method, the following amounts are to be
adjusted from the Net Income to calculate the net cash provided from
operating activities
Cash flows from operating activities: These are the cash produced by
the normal business operations.
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Statement of cash flows: It is one of the financial statement that shows the cash and cash equivalents of a company for a particular period. It determines the net changes in cash through reporting the sources and uses of cash due to the operating, investing, and financing activities of a company Indirect method: Under this method, the following amounts are to be adjusted from the Net Income to calculate the net cash provided from operating activities Cash flows from operating activities: These are the cash produced by the normal business operations.

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Step 2
The below table shows the way of calculation of cash flows from
operating activities:
Cash flows from operating activities (Indirect method)
Add: Decrease in current assets
Increase in current liability
Depreciation expense and amortization expense
Loss on sale of plant assets
Deduct: Increase in current assets
Decrease in current liabilities
Gain on sale of plant assets
Net cash provided from or used by operating activities
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The below table shows the way of calculation of cash flows from operating activities: Cash flows from operating activities (Indirect method) Add: Decrease in current assets Increase in current liability Depreciation expense and amortization expense Loss on sale of plant assets Deduct: Increase in current assets Decrease in current liabilities Gain on sale of plant assets Net cash provided from or used by operating activities

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Step 3
Compute the net cash flow from operating activities under indirect method:
Company M
Statement of cash flows- Indirect method (Partial
Amount in $ Amount in $
Particulars
Cash flow from operating activities:
Net income
Adjustments to re concile net income to net cash
flow from operating activities:
Change in current operating as sets and liabilities:
Increase in accounts receivable
Decrease in inventory
Increase in accounts payable
Net income from operating activities
89,300
(3,900)
10,900
4,000
100,300
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Compute the net cash flow from operating activities under indirect method: Company M Statement of cash flows- Indirect method (Partial Amount in $ Amount in $ Particulars Cash flow from operating activities: Net income Adjustments to re concile net income to net cash flow from operating activities: Change in current operating as sets and liabilities: Increase in accounts receivable Decrease in inventory Increase in accounts payable Net income from operating activities 89,300 (3,900) 10,900 4,000 100,300

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