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Cash flows from operating activities—indirect method The income statement disclosed the following items for the year: Depreciation expense $ 57,600 Gain on disposal of equipment 33,600 Net income 508,000 The changes in the current asset and liability accounts for the year are as follows: Increase (Decrease) Accounts receivable $ 8,960 Inventory (5,120) Prepaid insurance (1,920) Accounts payable (6,080) Income taxes payable 1,410 Dividends payable 2,200 A. Prepare the Clash flows from Operating Activities section of the statement of cash flows, using the indirect method. B. Briefly explain why net cash flow from operating activities is different than net income.

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Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337119207

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Section
BuyFindarrow_forward

Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337119207
Chapter 13, Problem 13.7EX
Textbook Problem
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Cash flows from operating activities—indirect method

The income statement disclosed the following items for the year:

Depreciation expense $ 57,600
Gain on disposal of equipment 33,600
Net income 508,000

The changes in the current asset and liability accounts for the year are as follows:

Increase

(Decrease)

Accounts receivable $ 8,960
Inventory (5,120)
Prepaid insurance (1,920)
Accounts payable (6,080)
Income taxes payable 1,410
Dividends payable 2,200
  • A. Prepare the Clash flows from Operating Activities section of the statement of cash flows, using the indirect method.
  • B. Briefly explain why net cash flow from operating activities is different than net income.

A.

To determine

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.

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

Table (1)

To Prepare: The cash flows from operating activities sections of the statement of cash flows using indirect method.

Explanation of Solution

Statement of Cash Flows - Indirect Method (Partial)
Details Amount ($) Amount ($)
Cash flows from operating activities:    
Net income   508,000
Adjustments to reconcile net income to net cash flow from operating activities:    
Depreciation expense 57,600  
Gain on disposal of equipment

B.

To determine

To Explain: Why net cash flow from operating activities is different from net income.

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Chapter 13 Solutions

Financial & Managerial Accounting
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