Using Exhibit 5, assume that the amount of Net Income on the Income Statement fo

Question

Using Exhibit 5, assume that the amount of Net Income on the Income Statement for the year was $71,800. When preparing the Statement of Cash Flow using the indirect method for the current year, which of the following statements would describe the proper presentation of net income on the Cash flow from operating activities section?

EXHIBIT 5    

                                                                                      Increase

                                                                                    (Decrease)      

Net Income (loss)                                                         $XXX

Adjustments to reconcile net income to net cash flow        

from operating activities:

   Depreciation of fixed assets                                       XXX

   Losses on disposal of assets                                      XXX

   Gains on disposal of assets                            (XXX)

Changes in current operating assets and liabilities:

   Increases in *noncash current operating assets     (XXX)

   Decreases in **noncash current operating assets   XXX

   Increases in **current operating liabilities              XXX

   Decreases in *current operating liabilities             (XXX)

          *SUBTRACT                                                         **ADD

Increases in accounts receivable                    Decreases in accounts receivable

Increases in inventory                                     Decreases in inventory

Increases in prepaid expenses                        Decreases in prepaid expenses

Decreases in accounts payable                       Increases in accounts payable

Decreases in accrued expenses payable        Increases in accrued expenses payable

Start the Cash Flow from Operating Activities section with the $71,800

Include the $71,800 in with the Adjustment to reconcile net income to net cash flows from operating activities section as an addition

Include the $71,800 in the Changes in current operating assets and liabilities as an addition

Ignore the $71,800 and do not use it in the Cash Flow from Operating Activities section

Start the Cash Flow from Operating Activities section with the $71,800

Include the $71,800 in with the Adjustment to reconcile net income to net cash flows from operating activities section as an addition

Include the $71,800 in the Changes in current operating assets and liabilities as an addition

Ignore the $71,800 and do not use it in the Cash Flow from Operating Activities section

Explanation / Answer

Dear Friend,

The Indirect method of Cash Flow from Operating Activities shall START WITH THE CASH FLOW FROM OPERATING ACTIVITIES SECTION WITH NET PROFIT FOR THE PERIOD = $ 71,800 and then followed by non - cash expenses, gains and losses that shall be added back or subtracted from NET INCOME OR NET PROFIT AND then finally followed by Changes in Current Operating Assets and Current Liabilities.

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