Question

The net income reported on the income statement for the current year was $210,000. Depreciation recorded on equipment and a building amount to $62,500 for the year. Balances of the current assets and current liabilities accounts at the beginning and end of the year are as follows:End of YearBeginning of YearCash$56,000$59,500Accounts Receivable (net)71,00073,400Inventories140,000126,500Prepaid Expenses7,8008,400Accounts Payable (merchandise creditors)62,60066,400Salaries Payable9,0008,2501. 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 out flows, cash payments, decreases in cash, or any negative adjustments

Answer 1

Answer:

Cash flows from operating activities section

                                                                  Amount in $  

Net income                                             210,000.00    

Depreciation                                              62,500.00        

Change in Accounts Receivable              -2,400.00

Change in Inventories                              13,500.00  

Change in Prepaid Expenses                 -600.00

Change in Accounts Payable                      3,800.00  

Change in Salaries Payable                         -750.00

Cash flows from operating activities     286,050.00    

Explanation:

The operating activities includes net income, depreciation and changes in current assets and current liabilities. The depreciation as a non-cash item is added back in the cash flows statement.

An increase in current assets represents an outflow of cash hence the negative value and vice versa. The increase in current liabilities represents an inflow of cash hence it is positive and vice versa. Below are the changes.

                                          Amount in $   Amount in $   D ifference

Change in Accounts Receivable  71,000    73,400       (2,400.00)

Change in Inventories                140,000    126,500   13,500.00  

Change in Prepaid Expenses    7,800       8,400      (600.00)

Change in Accounts Payable  62,600    66,400      3,800.00  

Change in Salaries Payable             9,000       8,250      (750.00)