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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

Cash flows from operating activities—indirect method

The net income reported on the income statement for the current year was $185:000 depreciation recorded on equipment and a building amounted to $96,000 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows:

  End of Year Beginning of Year
Cash $75,000 $86,150
Accounts receivable (ret) 84,550 90,000
Inventories 186,200 175,000
Prepaid expenses 3,600 4,500
Accounts payable (merchandise creditors) 91,500 110.000
Salaries payable 7,200 4,000

a. Prepare the Cash flows from operating activities section of the statement of cash flows, using the indirect method.

b. If the direct method had been used, would the net cash flow from operating activities have been the same? Explain.

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 Incometo 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

Working note:

Prepare the schedule in the changes of current assets and liabilities.

Schedule in the Change of Current Assets and Liabilities
Details Amount ($) Effect on Operating Activities
Beginning Balance Ending Balance

Increase/

b.

To determine

To Explain:  If direct method used would, the net cash flow from operating activities will be same.

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