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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Determining net income from net cash flow from operating activities

Curwen Inc. reported net cash flow from operating activities of $557,500 on its statement of cash flows for a recent year ended December 31. The following information was reported in the Cash flows from operating activities section of the statement of cash flows, using the indirect method:

Decrease in income taxes payable $7,700
Decrease in inventories 19,140
Depreciation 29,480
Gain on sale of investments 13,200
Increase in accounts payable 5,280
Increase in prepaid expenses 2,970
Increase in accounts receivable 14,300

a. Determine the net income reported by Curwen Inc. for the year ended December 31.

b. briefly explain why Curwen's net income is different from net cash flow from operating activities.

a.

To determine

Statement of cash flows: It is one of the financial statement that shows the inflows and outflows of 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, different items are adjusted from the net income to calculate the net cash provided from operating activities and the amount is further adjusted with cash flows from investing and financing activities to finally arrive at the closing balance of cash.

Cash flows from operating activities: These are the cash generated from 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)
Net Income                                                             xxxxx
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)

The net income reported by C Incorporation for the year ended December 31. 

Explanation

In this case, since one need to determine the net income from the net cash flows from operating activities, one should do the opposite adjustments then whatever explained above.

Prepare the statement to determine the net income as below;

DetailsAmount ($)Amount ($)
Net cash flow from operating activities 357,500
Add: Increase in accounts receivables14,300 
         Increase in prepaid expenses2,970 
         Decrease in income tax payable&...

b.

To determine

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

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