Question

Cash Flows from Operating Activities—Indirect Method

The income statement disclosed the following items for the year:

Depreciation expense	$35,300
Gain on disposal of equipment	20,580
Net income	264,900

The changes in the current asset and liability accounts for the year are as follows:

	Increase (Decrease)
Accounts receivable	$5,490
Inventory	(3,130)
Prepaid insurance	(1,170)
Accounts payable	(3,720)
Income taxes payable	1,170
Dividends payable	820

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)
For the year ended Dec. 31, --
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. Why is net cash flows from operating activities different than net income?

Cash flows from operating activities is based on________________ of accounting, whereas net income is computed using _______________ of accounting.

Answer 1

Requirement a

Statement of Cash Flows (partial)
For the year ended Dec. 31, --
Cash flows from operating activities:
Net Income	$264,900
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation expense	$ 35,300
Gain on disposal of equipment	$ (20,580)
Changes in current operating assets and liabilities:
Increase in Accounts receivable	$   (5,490)
Decrease in Inventory	$    3,130
Decrease in prepaid insurance	$    1,170
Decrease in accounts payable	$   (3,720)
Increase in income tax payable	$    1,170
Net cash flow from operating activities		$275,880

Requirement b

Cash flows from operating activities is based on Cash basis of accounting, whereas net income is computed using Accrual Basis of accounting.