The net income reported on the income statement for the current year was $240,000.

The net income reported on the income statement for the current year was $240,000. Depreciation recorded on equipment and a building amounted to $72,000 for the year. 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 $ 67,200 $ 72,000
Accounts receivable (net) 84,000 88,800
Inventories 168,000 150,000
Prepaid expenses 9,600 10,800
Accounts payable (merchandise creditors) 72,000 78,000
Salaries payable 12,000 10,200



a. Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method.
b. If the direct method had been used, would the net cash flow from operating activities have been the same? Explain.


Answer:

a. Cash flows from operating activities:
Net income……………………………………………………………… $240,000
Adjustments to reconcile net income to net cash
flow from operating activities:
Depreciation……………………………………………………… 72,000
Changes in current operating assets and liabilities:
Decrease in accounts receivable………………………… 4,800
Increase in inventories……………………………………… (18,000)
Decrease in prepaid expenses…………………………… 1,200
Decrease in accounts payable……………………………… (6,000)
Increase in salaries payable……………………………… 1,800
Net cash flow from operating activities…………………………… $295,800
b. Yes. The amount of cash flows from operating activities reported on the statement
of cash flows is not affected by the method of reporting such flows.