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Chapter 14: 19E (page 732)

Computing operating activities cash flow鈥攊ndirect method

The records of Vintage Color Engraving reveal the following:

Net income \( 36,000

Depreciation expense \) 5,000

Sales revenue 53,000

Decrease in current liabilities 19,000

Loss on sale of land 4,000

Increase in current assets other than cash 10,000

Acquisition of land 35,000

Compute cash flows from operating activities by the indirect method for year ended December 31, 2018.

Short Answer

Expert verified

Net cash provided by operating activities is $16,000.

Step by step solution

01

Cash flow from operating activities- Indirect method

Indirect method starts with net income and adjustments are made to reconcile net income to net cash provided by operating activities.

02

Cash flow from operating activities

Cash flows from operating activities

Amount

Amount

Net Income

$36,000

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

Depreciation expense

$5,000

Increase in current assets other than cash

($10,000)

Decrease in current liabilities

($19,000)

Loss on sale of land

$4,000

Net cash provided by operating activities

$16,000

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Most popular questions from this chapter

Classifying cash flow items Consider the following transactions:

  1. Purchased equipment for \(130,000 cash.
  2. Issued \)14 par preferred stock for cash.
  3. Cash received from sales to customers of \(35,000.
  4. Cash paid to vendors, \)17,000.
  5. Sold building for \(19,000 gain for cash.
  6. Purchased treasury stock for \)28,000.
  7. Retired a notes payable with 1,250 shares of the company鈥檚 common stock.

Identify the category of the statement of cash flows in which each transaction would be reported.

Question: Big Island, Inc. began 2018 with cash of \(40,000. During the year, Big Island earned revenue of \)200,000 and collected \(120,000 from customers. Expenses for the year totaled \)160,000, of which Big Island paid \(65,000 in cash to suppliers and \)80,000 in cash to employees. The company received \(2,000 cash for interest revenue and paid \)10,000 for income taxes. Big Island also paid \(35,000 to purchase equipment and a cash dividend of \)15,000 to its stockholders during 2018. Prepare the company鈥檚 operating activities section of the statement of cash flows for the year ended December 31, 2018. Use the direct method.

Classifying transactions on the statement of cash flows鈥攊ndirect method Consider the following transactions:

Identify the category of the statement of cash flows, indirect method, in which each transaction would be reported.

Preparing operating activities using the direct method Amy鈥檚 Learning Center has assembled the following data for the year ended June 30, 2018:

Payments to suppliers $ 115,000

Cash payment for purchase of equipment 39,000

Payments to employees 66,000

Payment of notes payable 34,000

Payment of dividends 7,500

Cash receipt from issuance of stock 22,000

Collections from customers 188,000

Cash receipt from sale of land 58,000

Cash balance, June 30, 2017 41,000 Prepare the operating activities section of the business鈥檚 statement of cash flows for the year ended June 30, 2018, using the direct method.

The comparative balance sheet of Jackson Educational Supply at December 31, 2018, reported the following:


20182017
Current

Assets:
Cash\( 87,700
\) 23,500
Accounts Receivable15,30022,000
Merchandise Inventory
62,600
60,400
Current

Liabilities:
Accounts Payable
28,100
26,100
Accrued Liabilities
10,600
11,300

Jackson鈥檚 transactions during 2018 included the following:

Payment of cash dividends \( 16,200

Depreciation expense \) 16,700

Purchase of equipment with cash 54,700

Purchase of building with cash 98,000

Issuance of long-term notes payable to borrow cash 48,000

Net income 57,600

Issuance of common stock for cash 105,000

Requirements

  1. Prepare the statement of cash flows of Jackson Educational Supply for the year ended December 31, 2018. Use the indirect method to report cash flows from operating activities.
  2. Evaluate Jackson鈥檚 cash flows for the year. Mention all three categories of cash flows, and give the reason for your evaluation.
  3. If Jackson plans similar activity for 2019, what is its expected free cash flow?
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