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Chapter 5: Q23Q. (page 238)

Net income for the year for Carrie, Inc. was \(750,000, but the statement of cash flows reports that net cash provided by operating activities was \)860,000. What might account for the difference?

Short Answer

Expert verified

Net cash from the operation is higher than the net income of the business entitybecause of higher non-cash expenses reported in the income statement.

Step by step solution

01

Definition of Accrual Accounting

The Accrual accounting concept can be defined as the accounting method of reporting all the business transactions of financial nature as they occur without considering the flow of cash.

02

Different in net income and net cash from operating activities

The difference between the net cash provided from operating activities and net income is non-cash expenses such as depreciation and amortization. Such expenses will reduce the net income but not reduce the cash from operating activities because it does not include cash outflow.

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Most popular questions from this chapter

(Reporting the Financial Effects of Varied Transactions) In an examination of Arenes Corporation as of 31 Dec, 2017, you have learned that the following situations exist. No entries have been made in the accounting records for these items.

1. The corporation erected its present factory building in 2001. Depreciation was calculated by the straight-line method, using an estimated life of 35 years. Early in 2017, the board of directors conducted a careful survey and estimated that the factory building had a remaining useful life of 25 years as of 1 Jan, 2017.

2. An additional assessment of 2016 income taxes was levied and paid in 2017.

3. When calculating the accrual for officers鈥� salaries at 31 Dec, 2017, it was discovered that the accrual for officers鈥� salaries for 31 Dec, 2016, had been overstated.

4. On 15 Dec, 2017, Arenes Corporation declared a cash dividend on its common stock outstanding, payable 1 Feb, 2018, to the common stockholders of record 31 Dec, 2017.

Instructions

Describe fully how each of the items above should be reported in the financial statements of Arenes Corporation for the year 2017.

The comparative balance sheets of Madrasah Corporation at the beginning and end of the year 2017 appear below.

MADRASAH CORPORATION

BALANCE SHEETS

Assets

Dec 31, 2017

Jan 1, 2017

Inc./Dec.

Cash

\(20,000

\)13,000

\(7,000 Inc.

Accounts receivable

106,000

88,000

18,000 Inc.

Equipment

39,000

22,000

17,000 Inc.

Less: Accumulated depreciation 鈥� Equipment

17,000

11,000

6,000 Inc.

Total

\)148,000

\(112,000

Liabilities and Stockholder鈥檚 equity

Account payable

\)20,000

\(15,000

5,000 Inc.

Common stock

100,000

80,000

20,000 Inc.

Retained earnings

28,000

17,000

11,000 Inc.

Total

\)148,000

\(112,000

Net income of \)44,000 was reported, and dividends of $33,000 were paid in 2017. New equipment was purchased and none was sold.

Instructions

(a) Prepare a statement of cash flows for the year 2017.

(b) Compute the current ratio (current assets 梅 current liabilities) as of January 1, 2017, and December 31, 2017, and compute free cash flow for the year 2017.

(c) In light of the analysis in (b), comment on Madrasah鈥檚 liquidity and financial flexibility.

BE5-2 (L03) Koch Corporation鈥檚 adjusted trial balance contained the following asset accounts at December 31, 2017: Cash \(7,000, Land \)40,000, Patents \(12,500, Accounts Receivable \)90,000, Prepaid Insurance \(5,200, Inventory \)30,000, Allowance for Doubtful Accounts \(4,000, and Equity Investments (trading) \)11,000. Prepare the current assets section of the balance sheet, listing the accounts in proper sequence.

Ames Company reported 2017 net income of \(151,000. During 2017, accounts receivable increased by \)13,000 and accounts payable increased by \(9,500. Depreciation expense was \)44,000. Prepare the cash flows from operating activities section of the statement of cash flows.

(L02,3) (Balance Sheet Classifications) Presented below are a number of balance sheet accounts of Deep Blue Something, Inc.

(a) Debt Investments.

(h)Interest Payable.

(b) Treasury Stock.

(i) Deficit.

(c) Common Stock.

(j) Equity Investments(ownership stake of less than 20%).

(d) Dividends Payable.

(k) Income Taxes Payable.

(e) Accumulated Depreciation鈥擡quipment.

(l) Unearned Subscriptionsrevenue.

(f) Construction in Process.

(m) Work in Process.

(g) Petty Cash.

(n) Salaries and WagesPayable.

Instructions For each of the accounts above, indicate the proper balance sheet classification. In the case of borderline items, indicate the additional information that would be required to determine the proper classification.
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