The income statement disclosed the following items for 2014:Depreciation expense $ 72,000

The income statement disclosed the following items for 2014:


Depreciation expense $ 72,000
Gain on disposal of equipment 42,000
Net income 635,000
Balances of the current assets and current liability accounts changed between December
31, 2013, and December 31, 2014, as follows:
Accounts receivable $11,200
Inventory 6,400*
Prepaid insurance 2,400*
Accounts payable 7,600*
Income taxes payable 2,400
Dividends payable 1,700
*Decrease



a. Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method.

b. Briefly explain why net cash flows from operating activities is different than net income.


Answer:

a. Cash flows from operating activities:
Net income……………………………………………………………… $635,000
Adjustments to reconcile net income to net cash
flow from operating activities:
Depreciation………………………………………………………… 72,000
Gain on disposal of equipment………………………………… (42,000)
Changes in current operating assets and liabilities:
Increase in accounts receivable…………………………… (11,200)
Decrease in inventory………………………………………… 6,400
Decrease in prepaid insurance……………………………… 2,400
Decrease in accounts payable……………………………… (7,600)
Increase in income taxes payable………………………… 2,400
Net cash flow from operating activities…………………………… $657,400
Note: The change in dividends payable would be used to adjust the dividends
declared in obtaining the cash paid for dividends in the Financing Activities
section of the statement of cash flows.
b. Cash flows from operating activities reports the cash inflow or outflow from a
company’s day-to-day operations. Net income reports the excess of revenues over
expenses for a company using the accrual basis of accounting. Revenues are
recorded when they are earned, not necessarily when cash is received. Expenses
are recorded when they are incurred and matched against revenue, not necessarily
when cash is paid. As a result, the cash flows from operating activities differs
from net income because it does not use the accrual basis of accounting.




An analysis of the general ledger accounts indicates that office equipment, which cost $144,000 and on which accumulated depreciation totaled $60,000 on the date of sale, was sold for $72,000 during the year. Using this information, indicate the items to be reported on the statement of cash flows.


Answer:

Cash flows from investing activities:
Cash received from sale of equipment…………………………………………… $72,000
The loss on the sale, $12,000 ($72,000 proceeds from sale less $84,000 book
value), would be added to net income in determining the cash flows from
operating activities if the indirect method of reporting cash flows from
operations is used.