the japanese firm sony prepares its financial statements using U.S. GAAP. Two it
ID: 2738965 • Letter: T
Question
the japanese firm sony prepares its financial statements using U.S. GAAP. Two items related to its inventory appeared in the operating section of a recent statement of cash flows, both in millions of yen; loss on impairment of assets (38308) and change in ineventories (160432). On the statement of cash flows both items were being added to Sony's net loss of 98,938 in the calculation of a highly positive (407,153) net cash provided by operating activities number. Included in the loss on impairment of assets was a sizable inventory write down. 1. Explain how net cash provided by operating activities can be such a large positive number while net income is negative. 2. Provide the basic structure of the inventory write-down entry, and explain why this amount would appear in the operating section of the statement of cash flows and be added to the net loss in the calculation of net cash provided by operating activities. 3. Did Sony's inventory increase or decrease during the year, and how do you know?
Explanation / Answer
1. The net income as reported by the income statement usually defers from the net cash provided by operating activities because in calcultion net income all cash and non-cash items are included whereas in while determining cash flows from operating activities only cash items are taken into consideratin. For example, depreciation expense is subtracted while calculating net income but it is added back to the net income while determining cash flows from operating actvities because it is a non-cash expense.
2. The inventory write-down enry is prepared by debiting "Loss from obsolecence" and crediting "Inventory". This amount appears in the operating section of cas flows statement because it does not involves any cash outflow. It is added back to the net income to get the cash flows from operating activities.
3. Inventory is a current asset and any increase in current assets is is subtracted from the net income to get the cash flows from operating activities because increase in current assets means cash inflow was blocked. In the question change in inventory is provided within parenthesis that means it was subtracted from the net income. This tells that inventory increased during the period covere by the cash flow statement.
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