Question

The net income reported on the income statement for the current year was $93,700. Depreciation recorded on store equipment for the year amounted to $31,200. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows:

End of Year Beginning of Year
Cash $24,100 $19,700
Accounts receivable (net) 65,000 56,000
Inventories 47,200 50,000
Prepaid expenses 3,250 8,000
Accounts payable (merchandise creditors) 23,400 17,200
Wages payable 5,300 6,400

Required:
a. Prepare the "Cash flows from operating activities" section of the statement of cash flows, using the indirect method.
b. Compute the increases and decreases in the current asset/liability accounts over the period. Determine what affect these changes would have on cash.

Answer 1

Answer and Explanation:

a. The preparation is presented below:

Cash flows from operating activities:

Net income $93,700.00

Adjustments made

Depreciation $31,200.00

Changes in current operating assets and liabilities:

Increase in accounts receivable $(9,000.00) ($65,000 - $56,000)

Decrease in inventories $2,800.00 ($47,200 - $50,000)

Decrease in prepaid expenses $4,750.00 ($3,250 - $8,000)

Increase in accounts payable $ 6,200.00 ($23,400 - $17,200)

Decrease in wages payable $(1,100.00) ($5,300 - $6,400)

Net cash flow from operating activities $128,550.00

b.

If there is decrease in the current liabilities and increased in current assets so both can be deducted here the cash is decreased and if this case is opposite so it would be added to the net income here the cash is increased