Question

Software Distributors reports net income of 555,000. Included in that number is depreciation expense of 510.000 and aloss on the sale of land of $5,000. A comparison of this year‘s and last year‘s balance sheets reveals a decrease in accountsreceivable of $25,000. a decrease in inventory of 515.000, and an increase in accounts payable of 545,000.Required.-Prepare the operating activities section of the statement of cash flows using the indirect method. Do you see a pattern inSoftware Distributors’ adjustments to net income to arrive at operating cash flows? What might this imply?

Answer 1

Answer:

Explanation:

The preparation of the Cash Flows from Operating Activities—Indirect Method is shown below:

Cash flow from Operating activities - Indirect method

Net income $555,000

Adjustment made:

Add : Depreciation expense $510,000

Add: Loss on the sale of land $5,000

Add: Decrease in accounts receivable $25,000

Add: Decrease in inventory $515,000

Add: Increase in accounts payable $545,000

Total of Adjustments $1,600,000

Net Cash flow from Operating activities                           $2,155,000

The operating cash flow is shown below:

= EBIT + Depreciation - Income tax expense

where,  

EBIT = Sales - cost of good sold - depreciation expense  

These things are considered for computing the operating cash flows