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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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Chapter
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BuyFindarrow_forward

College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

ADJUSTING NET INCOME FOR CHANGES IN CURRENT ASSETS AND CURRENT

LIABILITIES Brady Company reported net income of $30,000 for 20-2. The

December 31 balances of the current assets and current liabilities are shown below.

images

Compute cash provided by operating activities.

To determine

Compute cash provided by operating activities under indirect method.

Explanation

Statement of cash flows: This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.

Indirect method: Under indirect method, net income is reported first, and then non-cash expenses, losses from fixed assets, and changes in opening balances and ending balances of current assets and current liabilities are adjusted to reconcile the net income balance.

Cash flows from operating activities: Operating activities refer to the normal activities of a company to carry out the business.

The below table shows the way of calculation of cash flows from operating activities using indirect method:

Cash flows from operating activities (Indirect method)
Net income:
 
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)

Compute cash provided by operating activities under indirect method:

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