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Chapter 14: 20E (page 732)

Computing operating activities cash flow鈥攊ndirect method

The accounting records of CD Sales, Inc. include the following accounts: Account Beginning Balance Ending Balance Cash \( 7,500 \) 6,500 Accounts Receivable 21,000 17,500 Merchandise Inventory 20,000 30,000 Accounts Payable 15,000 19,000 Accumulated Depreciation鈥� Equipment

2,000 Depr. Exp.

56,000 Jul. 1

58,000 Jul. 31

Retained Earnings

Dividends 15,000

63,000 Jul. 1

50,000 Net Inc.

98,000 Jul. 31

Compute CD鈥檚 net cash provided by (used for) operating activities during July 2018. Use the indirect method.

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

Net Income

$50,000

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

Depreciation expense

$2,000

Decrease in account receivables

$3,500

Increase in merchandise inventory

($10,000)

Increase in accounts payable

$4,000

Net cash provided by operating activities

$49,500

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Most popular questions from this chapter

Using a spreadsheet to prepare the statement of cash flows鈥攊ndirect method Use the Boost Plus, Inc. data in Exercise E14-21 to prepare the spreadsheet for the 2018 statement of cash flows. Format cash flows from operating activities by the indirect method.

Identifying and reporting non-cash transactions

Dirtbikes, Inc. identified the following selected transactions that occurred during the year ended December 31, 2018:

  1. Issued 750 shares of \(3 par common stock for cash of \)17,000.
  2. Issued 5,100 shares of \(3 par common stock for a building with a fair market value of \)96,000.
  3. Purchased new truck with a fair market value of \(29,000. Financed it 100% with a long-term note.
  4. Retired short-term notes of \)28,000 by issuing 1,900 shares of \(3 par common stock.
  5. Paid long-term note of \)10,500 to Bank of Tallahassee. Issued new long-term note of $23,000 to Bank of Trust.

Identify any non-cash transactions that occurred during the year, and show how they would be reported in the non-cash investing and financing activities section of the statement of cash flows

Classic Rare Coins (CRC) was formed on January 1, 2018. Additional data for the year follow:

a. On January 1, 2018, CRC issued no-par common stock for \(525,000.

b. Early in January, CRC made the following cash payments:

1. For store fixtures, \)51,000

2. For merchandise inventory, \(240,000

3. For rent expense on a store building, \)18,000

c. Later in the year, CRC purchased merchandise inventory on account for \(243,000. Before year-end, CRC paid \)153,000 of these accounts payable.

d. During 2018, CRC sold 2,800 units of merchandise inventory for \(325 each. Before year-end, the company collected 95% of this amount. Cost of goods sold for the year was \)290,000, and ending merchandise inventory totaled \(193,000.

e. The store employs three people. The combined annual payroll is \)82,000, of which CRC still owes \(5,000 at year-end.

f. At the end of the year, CRC paid income tax of \)17,000. There were no income taxes payable.

g. Late in 2018, CRC paid cash dividends of $38,000.

h. For store fixtures, CRC uses the straight-line depreciation method, over five years, with zero residual value.

Requirements

1. What is the purpose of the statement of cash flows?

2. Prepare CRC鈥檚 income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together.

3. Prepare CRC鈥檚 balance sheet at December 31, 2018.

4. Prepare CRC鈥檚 statement of cash flows using the indirect method for the year ended December 31, 2018.

Using a spreadsheet to complete the statement of cash flows鈥� indirect method

Companies can use a spreadsheet to complete the statement of cash flows. Each item that follows is recorded in the transaction analysis columns of the spreadsheet.

  1. Net income
  2. Increases in current assets (other than Cash)
  3. Decreases in current liabilities
  4. Cash payment for acquisition of plant assets
  5. Cash receipt from issuance of common stock
  6. Depreciation expense

Identify each as being recorded by a Debit or Credit in the statement of cash flows section of the spreadsheet

Question: Explain why depreciation expense, depletion expense, and amortization expense are added to net income in the operating activities section of the statement of cash flows when using the indirect method.
See all solutions

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