Question

The following income statement and additional year-end information is provided.

SONAD COMPANY
Income Statement
For Year Ended December 31
Sales $1,647,000
Cost of goods sold 807,030
Gross profit 839,970
Operating expenses
Salaries expense $225,639
Depreciation expense 39,528
Rent expense 44,469
Amortization expenses—Patents 4,941
Utilities expense 18,117 332,694
507,276
Gain on sale of equipment 6,588
Net income $513,864
Accounts receivable $29,000 increase Accounts payable $14,925 decrease
Inventory 23,425 increase Salaries payable 5,000 decrease
Prepare the operating activities section of the statement of cash flows using the indirect method.

Answer 1

Cash flow from Operating Activities

Net income $513,864

Adjustment for Non-cash items :

Depreciation expense $39,528

Amortization expenses—Patents $4,941

Adjustment for Changes in Working Capital :

Increase in Accounts receivable ($29,000)

Decrease in Accounts payable ($14,925)

Increase in Inventory ($23,425)

Decrease in Salaries payable ($5,000)

Net Cash flow from Operating Activities $485,983

Step-by-step explanation:

The Indirect method, reconciles the Operating Profit to the Operating Cash Flow by adjusting for the following items :

1. Non-cash items previously added or deducted from the Operating Profit
2. Adjustments for Changes in Working Capital items