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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

Use the Rouse Exercise Equipment data in Exercise E14-23. Prepare the company鈥檚 statement of cash flows鈥攊ndirect method鈥攆or the year ended December 31, 2018. Assume investments are purchased with cash.

Preparing the statement of cash flows鈥攄irect method Use the Rolling Hills, Inc. data from Problem P14-34A. Requirements

1. Prepare the 2018 statement of cash flows by the direct method.

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

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?

Preparing the statement of cash flows鈥攄irect method The income statement and additional data of Value Corporation follow:

  1. Collections from customers are \(13,000 more than sales.
  2. Dividend revenue, interest expense, and income tax expense equal their cash amounts.
  3. Payments to suppliers are the sum of cost of goods sold plus advertising expense.
  4. Payments to employees are \)3,000 more than salaries expense.
  5. Cash payment for the acquisition of plant assets is \(102,000.
  6. Cash receipts from sale of land total \)29,000.
  7. Cash receipts from issuance of common stock total \(38,000.
  8. Payment of long-term notes payable is \)10,000.
  9. Payment of dividends is \(9,000.
  10. Cash balance at June 30, 2017, was \)21,000; at June 30, 2018, it was $43,000.
    Prepare Value Corporation鈥檚 statement of cash flows for the year ended June 30, 2018. Use the direct method.

Question: What accounts on the balance sheet must be evaluated when completing the financing activities section of the statement of cash flows?
See all solutions

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