Statement of
Indirect method: Under this method, the following amounts are to be adjusted from the Net Income to calculate the net cash provided from operating activities.
Cash flows from operating activities: These are the cash produced by the normal business operations.
The below table shows the way of calculation of cash flows from operating activities:
Cash flows from operating activities (Indirect method) |
Add: Decrease in current assets |
Increase in current liability |
Depreciation expense and amortization expense |
Loss on sale of plant assets |
Deduct: Increase in current assets |
Decrease in current liabilities |
Gain on sale of plant assets |
Net cash provided from or used by operating activities |
Table (1)
To Prepare: The reconciliation of net income to net cash flows.
Answer to Problem 21.20E
The reconciliation of net income to net cash flows of Company S is shown below.
Company S | ||
Statement of Cash Flows | ||
For the year ended December 31, 2016 | ||
Particulars | Amount ($) | Amount ($) |
Operating activities: | ||
Net income | $26,000 | |
Adjustments to reconcile net income to net cash from operating activities: | ||
Depreciation expense | $11,000 | |
Depletion expense | $5,000 | |
Loss on sale of land | $8,000 | |
Gain on sale of equipment | ($25,000) | |
Net noncash effects | ($1,000) | |
Changes in operating assets and liabilities: | ||
Add the expenses: | ||
Increase in accounts payable | $13,000 | |
Increase in salaries payable | $4,000 | |
Decrease in prepaid insurance | $6,000 | |
Decrease in bond discount | $1,000 | |
Increase in income tax payable | $12,000 | |
Net |
$36,000 | |
Less the gains: | ||
Increase in |
$54,000 | |
Net |
$54,000 | |
Increase in cash balance | ($18,000) | |
Net cash flows from operating activities | $7,000 |
Table (2)
Explanation of Solution
Working notes:
Calculate the amount of increase in accounts receivable:
Calculate the amount of increase in accounts payable:
Calculate the amount of increase in salaries payable:
Calculate the amount of decrease in prepaid insurance:
Calculate the amount of bond discount:
Calculate the amount of increase in income tax payable:
The reconciliation of net income to net cash flows of Company S shows the net cash balance from operating activities as $7,000.
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