The net income reported on the income statement for the current year was $323,00

Question

The net income reported on the income statement for the current year was $323,000. Depreciation recorded on equipment and a building amounted to $90,060 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows:

Required:

End of Year Beginning of Year Cash $89,700 $95,670 Accounts receivable (net) 111,690 119,220 Inventories 226,850 194,630 Prepaid expenses 12,730 14,220 Accounts payable (merchandise creditors) 96,000 103,120 Salaries payable 15,630 13,010

Explanation / Answer

Solution A:

Statement of Cash Flows (partial)

Indirect Method

1

Cash flows from operating activities:

2

Net Income

$323,000

3

Adjustments to reconcile net income to net cash flow from operating activities:

4

Depreciation (on equipment and a building)

$90,060

5

Changes in current operating assets and liabilities:

6

Decrease in Accounts receivable (net)

$7,530

7

Decrease in Prepaid expenses

$ 1,490

8

Increase in Salaries payable

$ 2,620

9

Increase in Inventories

-$ 32,220

10

Decrease in

Accounts payable (merchandise creditors)

-$7,120

$ 62,360

11

Cash Flows from Operating Activities

$ 385,360

Answer B:

Yes, if the direct method had been used, the net cash flow from operating activities would have been the same.

Note: Some of the items required for direct method are missing like cost of goods sold, sales etc. If provided, I would have shown working for direct method too. Partial calculation for direct method is as follows:

Statement of Cash Flows (partial)

Direct Method

Cash flows from operating activities:

Cash received from customers (WN 1)

$ 7,530

Cash payments to suppliers (WN 2)

$ 35,230

Working Notes (WN):

1: Cash received from customers:

= Accounts Receivable, net beginning -Accounts Receivable, net ending

= $ 119,220 - $ 111,690

=$ 7,530

2: Cash payments to suppliers:

= Accounts payable (merchandise creditors) beginning -Accounts Payable (merchandise creditors) ending + Inventory ending – Inventory beginning + Prepaid expenses ending – Prepaid expenses beginning- Increase in salaries payable

=$ 103,120 - $ 96,000 + $ 226,850 - $ 194,630 + $ 12,730 - $ 14,220 - $ 2,620

=$ 35,230

Statement of Cash Flows (partial)

Indirect Method

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