Question

Cash Flows from Operating Activities—Indirect Method

The net income reported on the income statement for the current year was $120,600. Depreciation recorded on store equipment for the year amounted to $19,900. 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 $49,330 $44,890
Accounts receivable (net) 35,370 33,170
Inventories 48,290 50,500
Prepaid expenses 5,430 4,260
Accounts payable (merchandise creditors) 46,220 42,470
Wages payable 25,260 27,740

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:
Net income $
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation
Changes in current operating assets and liabilities:
Increase in accounts receivable
Decrease in inventories
Increase in prepaid expenses
Increase in accounts payable
Decrease in wages payable
Net cash flow from operating activities $

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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 .

Answer 1

Cash flows from operating activities
Net Income		$ 120,600
Adjustments to reconcile net income to ;
Depreciation expense	$      19,900
Changes in current operating assets and liabilities
Increase in accounts receivable	$      (2,200)
Decrease in inventories	$        2,210
Increase in prepaid expenses	$      (1,170)
Increase in accounts payable	$        3,750
Decrease in wages payable	$      (2,480)
		$    20,010
Net cash provided by operating activities		$ 140,610

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