1. Why do we need to add back to net income non-cash transactions and changes in working capital assets when using the indirect method?
2. A company used cash for both operating and investing activities, but had a positive cash flow from financing activities. What does this cash flow pattern suggest about this company?
3. Sales for Harlem Tool & Die during 20X1 was $600,000, 75% of them on credit and 25% for cash. During the year, accounts receivable increased from $56,000 to $67,000. What amount of cash did Harlem collect from customer during 20X1?
4. Harlem Tool & Die reported salary expenses of $155,000 on its 20X1 income statement. It reported cash paid to employees of $136,000 on its cash flow statement. Beginning balance of wages payable was $8,000. What is the ending balance of wages payable? (ignore payroll taxes)
5. COGS for Harlem Tool & Die during 20X1 was $400,000. Beginning inventory was $64,000 and ending inventory was $89,000. Beginning accounts payable were $13,000 and ending accounts payable were $41,000. What amount of cash did Harlem pay to suppliers?
6. What are the typical cash inflows and outflows from financing activities?
7. Compare the two methods of reporting cash flows from operating activities.
Question1.Solution: Under indirect method of cash flow statement we begin with Net Income and for reaching to the cash flow from operating activities, we need to reconcile this net income to the cash flows from operations. For reconciling net income, we add back non-cash transaction and changes in working capital to get to the cash flow figure.
Question 2. Solution: This type of cash flow tells that company utilized its money in operating & investing activities thus it has a nagative cash flow from such activities and since it has a positive cash flow from financing activities means it has raised money through financing activities like: Bond issue or stock issue.
Solution: Cash collected from from customers during 20x1 = Beg. account rec. bal + Credit sales - Ending accounts rec. bal.
= $56,000 + $600,000*75% - $67,000
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