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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 income statement disclosed the following items for the year:

Depreciation expense $ 65,000
Gain on disposal of equipment 27,500
Net income 620,000

Statement of Cash Flows

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

 

Increase

(Decrease)

Accounts receivable $11,200
Inventory (6,350)
Prepaid insurance (1,200)
Accounts payable (4,200)
income taxes payable 1,650
Dividends payable 2,500

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

b. Briefly explain why net cash flows from operating activities is different from 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 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

Note:

Dividends payable is a financing activity and it will not come u...

b.

To determine

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

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