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.

Q: Expert Answer

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 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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Financial & Managerial Accounting

14th Edition

Carl Warren + 2 others

Publisher: Cengage Learning

ISBN: 9781337119207

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BuyFind

Financial & Managerial Accounting

14th Edition

Carl Warren + 2 others

Publisher: Cengage Learning

ISBN: 9781337119207

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Answer 3

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Answer 5

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

Answer 6

B.

To determine

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

Financial & Managerial Accounting

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

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