Question

The net income reported on the income statement for the current year was $93,700. Depreciation recorded on store equipment for the year amounted to $31,200. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows:
End of Year Beginning of Year
Cash $24,100 $19,700
Accounts receivable (net) 65,000 56,000
Inventories 47,200 50,000
Prepaid expenses 3,250 8,000
Accounts payable (merchandise creditors) 23,400 17,200
Wages payable 5,300 6,400
a. Prepare the "Cash flows from operating activities" section of the statement of cash flows, using the indirect method. Use the minus sign to indicate cash outflows, cash payments, decreases in cash, or any negative adjustments.
Statement of Cash Flows (partial)
Cash flows from operating activities:
Net income $
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation
Changes in current operating assets and liabilities:
Increase in accounts receivable
Decrease in inventories
Decrease in prepaid expenses
Increase in accounts payable
Decrease in wages payable
Net cash flow from operating activities $
Feedback
Compute the increases and decreases in the current asset/liability accounts over the period. Determine what affect these changes would have on cash.
b. Cash flows from operating activities differs from net income because it does not use the accrual basis of accounting. For example revenues are recorded on the income statement when they are earned .

Answer 1

Answer and Explanation:

a. The preparation of the operating activities section is presented below;

Cash flows from operating activities:  

Net income $93,700.00  

Adjustments made  

Depreciation $31,200.00  

Increase in accounts receivable $(9,000.00) ($65,000 - $56,000)

Decrease in inventories $2,800.00 ($47,200 - $50,000)

Decrease in prepaid expenses $4,750.00 ($3,250 - $8,000)

Increase in accounts payable $6,200.00 ($23,400 - $17,200)

Decrease in wages payable $(1,100.00) ($5,300 - $6,400)

Net cash flow from operating activities  $128,550.00

b. The cash flow from operating activities is differs from the net income as it does no use the accrual basis just like revenues are recorded when they are earned on the income statement