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Chapter 14: Q14-4SE (page 770)

Question: Computing cash flows from operating activities鈥攊ndirect method

DVR Equipment, Inc. reported the following data for 2018:

Income Statement:

Net Income $ 43,000

Depreciation Expense 6,000

Balance Sheet:

Increase in Accounts Receivable 6,000

Decrease in Accounts Payable 2,000

Compute DVR鈥檚 net cash provided by operating activities鈥攊ndirect method.

Short Answer

Expert verified

Answer

Net cash provided by operating activities is $41,000.

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

$43,000

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

Depreciation expense

$6,000

Increase in account receivables

($6,000)

Decrease in account payables

($2,000)

Net cash provided by operating activities

$41,000

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Most popular questions from this chapter

Question: Describing the purposes of the statement of cash flows Financial statements all have a goal.

The statement of cash flows does as well. Describe how the statement of cash flows helps investors and creditors perform each of the following functions:

a. Predict future cash flows.

b. Evaluate management decisions.

c. Predict the ability to make debt payments to lenders and pay dividends to stockholders.

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.

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

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.

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.
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