Question

Based on this income statement for Company D for the year ending December 31, 2014, what adjustment would need to be made to Net Income to account for Depreciation in calculating cash flow from Operating Activities using the indirect method?

Cost of Sales
Plant & Equipment Depreciation 180,000
Operating Expenses
Equipment Depreciation 50,000
Vehicle Depreciation 20,000
Office Equipment Depreciation 16,000

Answer 1

To account for depreciation in calculating cash flow from operating activities, we need to add back the total depreciation expense to net income.

Step-by-step explanation:

To account for depreciation in calculating cash flow from operating activities using the indirect method, we would need to add back the total depreciation expense to net income. In this case, the total depreciation expense is the sum of plant & equipment depreciation ($180,000), equipment depreciation ($50,000), vehicle depreciation ($20,000), and office equipment depreciation ($16,000), which adds up to $266,000. So the adjustment to net income would be an increase of $266,000.

To adjust for depreciation when calculating cash flow from operating activities using the indirect method, we start with the net income and add back the total depreciation expense. In this case, the depreciation expenses are listed as:Plant & Equipment Depreciation: $180,000Equipment Depreciation: $50,000Vehicle Depreciation: $20,000Office Equipment Depreciation: $16,000The total depreciation is therefore $180,000 + $50,000 + $20,000 + $16,000, which equals $266,000. This amount should be added back to the net income to calculate the cash flow from operating activities. The adjustment to the net income for depreciation is necessary because depreciation is a non-cash expense that reduces net income but does not affect actual cash flow.