Question

The income statement disclosed the following items for the year:

Depreciation expense	$ 65,000
Gain on disposal of equipment	27,500
Net income	620,000

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

	Increase (Decrease)
Accounts receivable	$11,200
Inventory	(6,350)
Prepaid insurance	(1,200)
Accounts payable	(4,200)
Income taxes payable	1,650
Dividends payable	2,500

Required:

A.

Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries. Use the minus sign to indicate cash outflows, cash payments, decreases in cash and for any adjustments, if required.

B.

Briefly explain why net cash flows from operating activities is different than net income.

Amount Descriptions

Amortization of intangible assets

Cash paid for dividends

Decrease in accounts payable

Decrease in accounts receivable

Decrease in dividends payable

Decrease in income taxes payable

Decrease in inventory

Decrease in prepaid insurance

Depreciation

Gain on disposal of equipment

Increase in accounts payable

Increase in accounts receivable

Increase in dividends payable

Increase in income taxes payable

Increase in inventory

Increase in prepaid insurance

Loss on disposal of equipment

Net cash flow from operating activities

Net cash flow used for operating activities

Net income

Net loss

A. Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries. Use the minus sign to indicate cash outflows, cash payments, decreases in cash and for any adjustments, if required.

Statement of Cash Flows (partial)

1	Cash flows from operating activities:
2
3	Adjustments to reconcile net income to net cash flow from operating activities:
4
5
6	Changes in current operating assets and liabilities:
7
8
9
10
11
12

Answer 1

Cash flow from operating activities
Net income		620000
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation expense	65000
Gain on sale of equipment	-27500
Changes in current operating assets and liabilities:
Increase account receivable	-11200
Decrease inventory	6350
Decrease prepaid insurance	1200
Decrease account payable	-4200
Increase income tax payable	1650
		31300
Net cash flow from operating activities		651300

In net income income and expense will be taken in accured basis and also include non cash expense like depreciation but in cash flow there is only cash revenue and expense will be taken so net income will be differ from net cash flow from operating activities