Using the Exhibit below, assume that the depreciation expense on the Income Statement for the year was $38,000. When preparing the Statement of Cash Flow using the indirect method for the current year, which of the following statements would describe the proper presentation of depreciation expense on the Cash flow from operating activities section? EXHIBIT Increase (Decrease) Net Income (loss) $XXX Adjustments to reconcile net income to net cash flow from operating activities: Depreciation of fixed assets XXX Losses on disposal of assets XXX Gains on disposal of assets (XXX) Changes in current operating assets and liabilities: Increases in *noncash current operating assets (XXX) Decreases in **noncash current operating assets XXX Increases in **current operating liabilities XXX Decreases in *current operating liabilities (XXX) *SUBTRACT **ADD Increases in accounts receivable Decreases in accounts receivable Increases in inventory Decreases in inventory Increases in prepaid expenses Decreases in prepaid expenses Decreases in accounts payable Increases in accounts payable Decreases in accrued expenses payable Increases in accrued expenses payable Group of answer choices Start the Cash Flow from Operating Activities section with the $38,000 Include the $38,000 as an addition in the Adjustments to reconcile net income to net cash flow from operating activities section. Include the $38,000 as a deduction in the Adjustments to reconcile net income to net cash flow from operating activities section. Ignore the $38,000 and do not use it in the Cash Flow from Operating Activities section.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Using the Exhibit below, assume that the
EXHIBIT
Increase
(Decrease)
Net Income (loss) $XXX
Adjustments to reconcile net income to net cash flow
from operating activities:
Depreciation of fixed assets XXX
Losses on disposal of assets XXX
Gains on disposal of assets (XXX)
Changes in current operating assets and liabilities:
Increases in *noncash current operating assets (XXX)
Decreases in **noncash current operating assets XXX
Increases in **current operating liabilities XXX
Decreases in *current operating liabilities (XXX)
*SUBTRACT **ADD
Increases in accounts receivable Decreases in accounts receivable
Increases in inventory Decreases in inventory
Increases in prepaid expenses Decreases in prepaid expenses
Decreases in accounts payable Increases in accounts payable
Decreases in accrued expenses payable Increases in accrued expenses payable
Group of answer choices
Start the Cash Flow from Operating Activities section with the $38,000
Include the $38,000 as an addition in the Adjustments to reconcile net income to net cash flow from operating activities section.
Include the $38,000 as a deduction in the Adjustments to reconcile net income to net cash flow from operating activities section.
Ignore the $38,000 and do not use it in the Cash Flow from Operating Activities section.
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