Learning Objective 3: Compute cash flows from operating activities—indirect meth

Question

Learning Objective 3: Compute cash flows from operating activities—indirect method) The accounting records of South Central Distributors, Inc., reveal the following: Net income $ 42,000 Collection of dividend revenue 7,100 Payment of interest 12,000 Sales revenue 307,000 Gain on sale of land 26,000 Acquisition of land 35,000 Depreciation $ 6,000 Decrease in current liabilities 25,000 Increase in current assets other than cash 29,000 Payment of dividends 7,700 Payment of income tax 14,000 Requirement 1. Compute cash flows from operating activities by the indirect method. Use the format of the operating activities section of Exhibit 12-6. Also evaluate the operating cash flow of South Central Distributors. Give the reason for your evaluation.

Explanation / Answer

Cash flow from operating activities

No working of sale revenue because it is already worked to Net income

Acquisition of land 35000 is deducted from investing activities.

Payment oif dividend is deductible from financing activities

Cash outflow from operating activities =41100

Particulars Amount Net Income ( assumed to be before tax) 42000 Less: Dividend income ( Added in financing activities) (7100) Add: Payment of interest ( Deducted in financing activities) 12000 Less: Gain on sale of Land ( Treated seperately in investing activites) (26000) Add: Depreciation ( Non cash expense) 6000 (15100) OPerating profits before working capital changes 26900 Change in Current assets and Liabilities Less: increase in other current assets (29000) Less: Decrease in current liabilities (25000) Net cash flow from operating activities before tax (27100) Less : taxes (14000) Net cash flow from operating activities (41100)

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