Question

The income statement disclosed the following items for 2016:

Depreciation expense	$65,140
Gain on disposal of equipment	29,350
Net income	408,700

Balances of the current assets and current liability accounts changed between December 31, 2015, and December 31, 2016, as follows:

	Increase (Decrease)
Accounts receivable	$8,540
Inventory	(4,200)
Prepaid insurance	(1,600)
Accounts payable	(6,220)
Income taxes payable	1,620
Dividends payable	2,270

Required:

A.

Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries. Use the minus sign to indicate cash outflows, cash payments, decreases in cash and for any adjustments, if required.

Statement of Cash Flows (partial)

1	Cash flows from operating activities:
2
3	Adjustments to reconcile net income to net cash flow from operating activities:
4
5
6	Changes in current operating assets and liabilities:
7
8
9
10
11
12

B.

Briefly explain why net cash flows from operating activities is different than net income. (Choose one)

Cash flows from operating activities differs from net income because it does not use the (accrual basis, cash basis) of accounting. For example, revenues are recorded on the income statement when (they are earned, cash is received)

Answer 1

Statement of Cash Flows (partial)
Cash flows from operating activities:
Net income	408700
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation expense	65140
Gain on disposal of equipment	-29350
Changes in current operating assets and liabilities:
Increase in accounts receivable	-8540
Decrease in Inventory	4200
Decrease in Prepaid insurance	1600
Decrease in Accounts payable	-6220
Increase in Income taxes payable	1620
Net cash flow from operating activities		437150
B
Cash flows from operating activities differs from net income because it does not use the accrual basis of accounting.
For example, revenues are recorded on the income statement when they are earned