Question

Cash Flows from Operating Activities—Indirect Method

The net income reported on the income statement for the current year was $117,600. Depreciation recorded on store equipment for the year amounted to $19,400. 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	$45,630		$41,520
Accounts receivable (net)	32,720		30,680
Merchandise inventory	44,670		46,710
Prepaid expenses	5,020		3,940
Accounts payable (merchandise creditors)	42,760		39,280
Wages payable	23,360		25,660

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 flow
Cash flow from operating activities:
Net income		$117,600
Adjustment to reconcile net income to operating cash flow
Depreciation expense		$19,400
Change in operating current assets and current liabilities
Increase in accounts receivable (30,680-32720)	(2,040)
Decrease in Merchandise inventory (46,710-44670)	2,040
Increase in Prepaid expenses(3,940-5020)	(1,080)
Increase in accounts payable (42,760-39280)	3,480
Decrease in wages payable (23,360-25660)	(2300)	$100
Net cash provided by operating activities		$137,100

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.