Debit Credit $240,200 Net Income Cash flow from operating activities Depreciatio

Question

Debit Credit $240,200 Net Income Cash flow from operating activities Depreciation expense Accounts receivable (+) Inventory (+) Accounts payable (+) Short term notes payable (-) 31,600 (60,200) (33,600) 35,600 (37.800) (64,400) 175,800 Net cash provided by operating activities Cash flow from investing activities Equipment purchase Sale of land (84,000) 42,800 Net cash used by investing activities (41,200) Cash flow from financing activities Payment of cash dividend (101,600) Net cash used by financing activities Cash net increase Cash at the beginning of the year Cash at the end of the year (101,600) 33,000 42,000 75,000

Explanation / Answer

A Cash flow statement is a financial statement which shows how changes in balance sheet accounts and income affect cash and cash equivalents and breaks the analysis down to operating , investing and financing activities. It provides information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances. It also provides information on changes in assets, liabilities and equities.

The above statement for Stanislaus reveals that the operating activities provide a favourable balance of $175,800 which has been prepared using the indirect method. There is an increase in current liability (accounts payable) which is added back to net income and a decrease in current liabilty (short term notes payable) which is subtracted from net income. Also there has been an increase in current assets ( accounts receivable and inventory) which have been subtracted from net income to arrive at the figure of 175,800. Depreciation being a non cash expense has been added back to net income as it does not affect cashflows.

Cash has been used in investing activity as the cash paid for the equipment purchase is more than the cash revenue form sale of land.

Cash from financing activities is also unfavourable as it has been used to pay dividends and there has been no inflow of cash on acount of financing activities.

Overall, considering the cummulative effect of all 3 activities, there has been a net increase in cash of $33,000. Cash balance at the beginning of the year is $42,000 which is added to Cash net increase to arrive at the closing balance of cash. Thus there is enough liquidity as can be seen from the above statement of cash flows.

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