Question

Cash Flows from Operating Activities—Indirect Method

The net income reported on the income statement for the current year was $128,200. Depreciation recorded on store equipment for the year amounted to $21,200. 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	$49,100		$45,170
Accounts receivable (net)	35,200		33,380
Inventories	48,070		50,820
Prepaid expenses	5,400		4,290
Accounts payable (merchandise creditors)	46,010		42,730
Wages payable	25,140		27,920

a. Prepare the “Cash flows from operating activities” section of the statement of cash flows, using the indirect method. Use the minus sign to indicate cash outflows, cash payments, decreases in cash, or any negative adjustments.

Statement of Cash Flows (partial)
Cash flows from operating activities:
	$
Adjustments to reconcile net income to net cash flow from operating activities:
Changes in current operating assets and liabilities:
Net cash flow from operating activities		$

b. Cash flows from operating activities differs from net income because it does not use the   of accounting. For example revenues are recorded on the income statement when  .

Answer 1

a
Statement of Cash Flows (partial)
Cash flows from operating activities:
Net income	128200
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation	21200
Changes in current operating assets and liabilities:
Increase in accounts receivable	-1820		=33380-35200
Decrease in merchandise inventory	2750		=50820-48070
Increase in prepaid expenses	-1110		=4290-5400
Increase in accounts payable	3280		=46010-42730
Decrease in wages payable	-2780		=25140-27920
Net cash flow from operating activities		149720
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