Question

Wildhorse Co. reported net income of $176,240 for 2017. Wildhorse Co. also reported depreciation expense of $34,330 and a loss of $4,840 on the disposal of plant assets. The comparative balance sheets show an increase in accounts receivable of $13,520 for the year, a $16,200 increase in accounts payable, and a $3,990 increase in prepaid expenses.
Prepare the operating activities section of the statement of cash flows for 2017. Use the indirect method. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)

Answer 1

Answer:

Wildhorse Co.

Operating activities section of the Statement of Cash Flows for 2017, using the indirect method:

Net Income = $176,240

Add Depreciation = $34,330

Add Loss on Plant Disposal = $4,840

Less Increase in accounts receivable = $13,520

Add increase in accounts payable = $16,200

Less increase in prepaid expenses = $3,990

Net cash flow from operating activities = $214,100

Explanation:

The Statement of Cash Flows is one of the three major financial statements that an entity prepares periodically.  It shows the sources the entity generated cash flows from and the means it spent the cash flows.  This statement has three sections: the operating activities section, the financing section, and the investment section.

The operating section shows the cash inflows and outflows from the entity's ordinary business operations.

The financing section shows the sources of funding and their repayment.

The investing section shows the resources acquired and their disposal.

For the operating activities section, using the indirect method as against the direct method, the net income is adjusted for non-cash expenses like Depreciation, Amortization, Loss on Asset Disposal, etc.

The cash flows from the operating activities section also reflects changes in working capital with a positive change in assets from one period to the next recorded as a cash outflow, while a positive change in liabilities is recorded as a cash inflow, and vice versa.

According to investopedia.com, "Inventories, accounts receivable, tax assets, accrued revenue, and deferred revenue are common examples of assets for which a change in value will be reflected in cash flow from operating activities.

Accounts payable, tax liabilities, and accrued expenses are common examples of liabilities for which a change in value is reflected in cash flow from operations."