Question

Cash Flows from Operating Activities—Indirect Method

The net income reported on the income statement for the current year was $126,900. Depreciation recorded on store equipment for the year amounted to $20,900. 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	$51,650		$47,520
Accounts receivable (net)	37,030		35,120
Merchandise inventory	50,570		53,460
Prepaid expenses	5,680		4,510
Accounts payable (merchandise creditors)	48,400		44,950
Wages payable	26,440		29,370

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)

Cash Flow From Operating Activities ( Indirect Method)

Particular	Amount	Amount
Cash flow from operating activity:
Net income		$126,900
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation expense	$20,900
Changes in current operating assets and liabilities:
Increase in accounts receivable	-$1,910
Decrease in merchandise inventory	$2,890
Increase in prepaid expense	-$1,170
Increase in accounts payable	$3,450
Decrease in wages payable	-$2,930	$21,230
Net cash provided by operating activities.		$105,670

b) Cash flow from operating activities differs from net income as net income is calculated by substracting expenses, taxes, and cost of goods sold from the revenue while operating cash flow is calculated by substracting operating expenses from cash generated from operations.