Question

The accounting records of Baddour Company provided the data below.

Net loss $5,000
Depreciation expense 6,000
Increase in salaries payable 500
Decrease in accounts receivable 2,000
Increase in inventory 2,300
Amortization of patent 300
Reduction in discount on bonds 200

Required:
Prepare a reconciliation of net income to net cash flows from operating activities.

Answer 1

To reconcile Baddour Company's net loss to net cash flows, non-cash expenses like depreciation and amortization are added back, and working capital adjustments are made. The net cash provided by operating activities is calculated to be $1,300.

Step-by-step explanation:

To reconcile the net loss reported on the income statement to the net cash flows from operating activities for Baddour Company, we adjust the net loss by the changes in working capital accounts and non-cash expenses. Here's how the reconciliation is laid out:

1. Start with the net loss of $5,000.
2. Add back non-cash expenses: Depreciation expense ($6,000) and amortization of patent ($300).
3. Adjust for changes in working capital: Increase in salaries payable ($500), decrease in accounts receivable ($2,000). These increase cash flow.
4. Adjust for changes that decrease cash flow: Increase in inventory ($2,300) and the reduction in discount on bonds ($200).

The adjusted net cash flow from operating activities is calculated as follows:

• Net loss: -$5,000
• Add: Depreciation expense: +$6,000
• Add: Amortization of patent: +$300
• Add: Decrease in accounts receivable: +$2,000
• Add: Increase in salaries payable: +$500
• Deduct: Increase in inventory: -$2,300
• Deduct: Reduction in discount on bonds: -$200

Net cash provided by operating activities: $1,300

Answer 2

Net cash flow from operating activities $1,700

Step-by-step explanation:

The preparation of the reconciliation of net income to net cash flows from operating activities is shown below:

Net loss -$5,000

Add: Depreciation expense 6,000

Add: Increase in salaries payable 500

Add: Decrease in accounts receivable 2,000

Less; Increase in inventory 2,300

Add; Amortization of patent 300

Add; Reduction in discount on bonds 200

Net cash flow from operating activities $1,700