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Chapter 14: Q14-7RQ (page 768)

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.

Short Answer

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Answer

Depreciation expense, depletion expense, and amortization expense are added to net income to get net cash flow from operating activities.

Step by step solution

01

Depreciation expense, depletion expense, and amortization expense 

Depreciation, depletion, and amortization are the non-cash expenses that are debited to the statement of profit and loss account.

02

Reasons, why depreciation expense, depletion expense, and amortization expense are added to net income in the operating expenses

Depreciation, depletion, and amortization are the non-cash expenses and the cash flow statement only records cash transactions except few exceptions therefore, these expenses are added to the net income in the operating expenses. The cash transactions related to these expenses are recorded in the balance sheet.

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Most popular questions from this chapter

Question: Classifying items on the indirect statement of cash flows

The statement of cash flows categorizes like transactions for optimal reporting. Identify each item as a(n):

鈥� Operating activity鈥攁ddition to net income (O+) or subtraction from net income (O-)

鈥� Investing activity鈥攃ash inflow (I+) or cash outflow (I-)

鈥� Financing activity鈥攃ash inflow (F+) or cash outflow (F-)

鈥� Non-cash investing and financing activity (NIF)

鈥� Activity that is not used to prepare the indirect statement of cash flows (N)

The indirect method is used to report cash flows from operating activities.

  1. Loss on sale of land.
  2. Acquisition of equipment by issuance of note payable.
  3. Payment of long-term debt.
  4. Acquisition of building by issuance of common stock.
  5. Increase in Salaries Payable.
  6. Decrease in Merchandise Inventory.
  7. Increase in Prepaid Expenses.
  8. Decrease in Accrued Liabilities.
  9. Cash sale of land (no gain or loss).
  10. Issuance of long-term note payable to borrow cash.
  11. Depreciation Expense.
  12. Purchase of treasury stock.
  13. Issuance of common stock.
  14. Increase in Accounts Payable.
  15. Net income.
  16. Payment of cash dividend

Preparing the statement of cash flows鈥攊ndirect method with non-cash transactions the 2018 income statement and comparative balance sheet of Rolling Hills, Inc. follow:

Additionally, Rolling Hills purchased land of \(21,100 by financing it 100% with long-term notes payable during 2018. During the year, there were no sales of land, no retirements of stock, and no treasury stock transactions. A plant asset was disposed of for \)0. The cost and the accumulated depreciation of the disposed asset was $13,410. The plant acquisition was for cash.

Requirements

1. Prepare the 2018 statement of cash flows, formatting operating activities by the indirect method.

2. How will what you learned in this problem help you evaluate an investment?

Preparing the statement of cash flows-indirect statement This problem continues the Canyon Canoe Company situation from Chapter 13. Canyon Canoe Company's comparative balance sheet is shown below. 2019 amounts are assumed, but include several transactions from prior chapters.

Additional data fellow:

  1. The income statement for 2019 included the following items: Net income, \(417,000. Depreciation expense for the year, \)34,330. Amortization on the bonds payable, \(254.
  2. There were no disposals of property, plant and equipment during this year. All acquistions of PP&E were for cash except the land, which was acquired by issuing preferred stock.
  3. The company issued bonds payable with a face value of \)210,000, receiving cash of \(208,476.
  4. The company distributed 4,000 shares of common stock in a stock dividend when the market value was \)4.50 per share. All other dividends were paid in cash.
  5. The common stock, except for the stock dividend, was issued for cash.
  6. The cash receipt from the note payable in 2019 is considered a financing activity because it does not relate to operations. Requirements Prepare the statement of cash flows for the year ended December 31, 2019, using the indirect method.

Question: Classifying items on the statement of cash flows Cash flow items

must be categorized into one of four categories. Identify each item as operating (O), investing (I), financing (F), or non-cash (N).

a. Cash purchase of merchandise inventory

b. Cash payment of dividends

c. Cash receipt from the collection of long-term notes receivable

d. Cash payment for income taxes

e. Purchase of equipment in exchange for notes payable

f. Cash receipt from the sale of land

g. Cash received from borrowing money

h. Cash receipt for interest income

i. Cash receipt from the issuance of common stock

j. Cash payment of salaries

Question: Muench, Inc.鈥檚 accountant has partially completed the spreadsheet for the statement of cash flows. Fill in the remaining missing information.
See all solutions

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