Question

Exercise 12-8 (Static) Indirect: Inferring net income from operating cash flows LO P2 Cain Company reports net cash provided by operating activities of $30,000. It also reports the following information under "Adjustments to reconcile net income to net cash provided by operating activities" on its statement of cash flows (using the indirect method).

Answer 1

To infer net income using the indirect method, adjustments are made to the net cash provided by operating activities, taking into account non-cash expenses and changes in working capital. Accounting profit is calculated by subtracting explicit costs from revenues, while economic profit adjusts accounting profit by subtracting implicit costs.

Step-by-step explanation:

Understanding Indirect Method of Cash Flow

The student's question revolves around the indirect method for calculating net income from the operating cash flows presented in a company's statement of cash flows. To infer the net income from operating cash flows using the indirect method, one needs to adjust for changes in working capital accounts, add back non-cash expenses, and subtract gains or add losses related to investing or financing activities from the net cash provided by operating activities.

Calculating Accounting Profit

Accounting profit is determined by subtracting explicit costs from total revenues. For example, if a company has revenues of $200,000 and explicit costs of $85,000, the accounting profit would be $115,000 ($200,000 - $85,000).

Calculating Economic Profit

The next step is to factor in the implicit costs to determine the economic profit. This is done by subtracting the implicit costs from the previously calculated accounting profit. If the accounting profit is $50,000 and the implicit costs are $30,000, the economic profit would therefore be $20,000 ($50,000 - $30,000). A negative economic profit, such as -$10,000, indicates that the company is not covering all of its costs including opportunity costs.

Answer 2

To determine net income from the operating cash flows using the indirect method, accounting profit is found by subtracting explicit costs from revenues. Economic profit goes a step further by also subtracting implicit costs. Examples provided help differentiate between the two types of profit calculations.

Step-by-step explanation:

Understanding Accounting and Economic Profit

To infer the net income from operating cash flows using the indirect method, certain adjustments are made to the cash provided by operating activities. One of the steps involves calculating the accounting profit. This is done by subtracting explicit costs from the revenues. The information provided suggests that the company had revenues of $200,000 and explicit costs of $85,000, which results in an accounting profit of $115,000.

However, to determine the true economic profit, both explicit and implicit costs must be subtracted from the total revenues. For example, if a chapter example indicates that a company has $200,000 in revenues, $85,000 in explicit costs, and $125,000 in implicit costs, the economic profit would be a negative $10,000 per year, indicating a loss when considering opportunity costs.

For the original question, without the additional information on implicit costs or changes in working capital, we cannot provide the exact net income figure. However, the examples provide insights into how different types of costs are considered in calculating accounting and economic profit, which are critical concepts in financial accounting and decision-making.