Final answer:
To prepare the statement of cash flows using the indirect method, follow these steps: start with net income, add back non-cash expenses, adjust for changes in non-current accounts, adjust for changes in current assets and liabilities, compute net cash provided/used by operating, investing, and financing activities, and add the net change in cash to the beginning cash balance to obtain the ending cash balance.
Step-by-step explanation:
To prepare the statement of cash flows using the indirect method, we need to consider all the changes in the balance sheet accounts and adjust them for non-cash items. Here are the steps:
- Start with net income. In this case, the net income is $27,900.
- Add back any non-cash expenses: depreciation. The change in accumulated depreciation is ($15,000 - (-$10,000)) = $5,000.
- Adjust for changes in non-current accounts that have a direct effect on cash flows. In this case, the only change is the sale of land for $5,900.
- Adjust for changes in current assets and current liabilities. In this case, the change in accounts receivable is ($18,200 - $23,400) = -$5,200, and the change in accounts payable is ($12,370 - $31,100) = -$18,730.
- Compute the net cash provided/used by operating activities by summing all the adjustments.
- Compute the net cash provided/used by investing activities by considering the change in non-current assets (only the land sale) and the change in cash.
- Compute the net cash provided/used by financing activities by considering the change in common stock and retained earnings and the payment of dividends.
- Sum up the net cash provided/used by operating, investing, and financing activities to arrive at the net change in cash.
- Add the beginning cash balance to the net change in cash to obtain the ending cash balance. In this case, the ending cash balance is $21,570.