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Ch 16-3 Exercises and Problems

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Cash Flows from Operating Activities—Indirect Method

The net income reported on the income statement for the current year was $123,600. Depreciation recorded on store equipment for the year amounted to $20,400. 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	$49,810		$45,830
Accounts receivable (net)	35,710		33,870
Merchandise inventory	48,760		51,560
Prepaid expenses	5,480		4,350
Accounts payable (merchandise creditors)	46,670		43,360
Wages payable	25,500		28,320

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 out flows, 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

Solution A:

Statement of Cash Flows (partial)

1	Cash flows from operating activities:
2	Net Income		$123,600
3	Adjustments to reconcile net income to net cash flow from operating activities:
4	Depreciation (on equipment)	$ 20,400
5	Changes in current operating assets and liabilities:
6	Increase in Accounts receivable (net)	-$1,840
7	Increase in Prepaid expenses	- $ 1,130
8	Decrease in wages payable	-$ 2,820
9	Decrease in Merchandise Inventories	$ 2,800
10	Increase in Accounts payable (merchandise creditors)	$3,310	$ 20,720
11	Cash Flows from Operating Activities		$ 144,320

Answer (b). Cash flows from operating activities differ 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.