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Chapter 14: Q14-5SE (page 770)

Question: Computing cash flows from operating activities—indirect method

Winding Road Cellular accountants have assembled the following data for the year ended April 30, 2018:

Cash receipt from sale of land \( 27,000

Net income \) 55,000

Depreciation expense 2,000

Cash purchase of equipment 44,000

Cash payment of dividends 5,800

Decrease in current liabilities 20,000

Cash receipt from issuance of common stock 17,000

Increase in current assets other than cash 27,000

Prepare the operating activities section using the indirect method for Winding Road Cellular’s statement of cash flows for the year ended April 30, 2018.

Short Answer

Expert verified

Answer

Net cash provided by operating activities is $10,000

Step by step solution

01

Cash flow from operating activities- Indirect method

Indirect method starts with net income and adjustments are made to reconcile net income to net cash provided by operating activities.

02

Cash flow from operating activities

Cash flows from operating activities

Net Income

$55,000

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

Depreciation expense

$2,000

Increase in current assets other than cash

($27,000)

Decrease in current liabilities

($20,000)

Net cash provided by operating activities

$10,000

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Most popular questions from this chapter

Computing operating activities cash flow—indirect method

The accounting records of CD Sales, Inc. include the following accounts: Account Beginning Balance Ending Balance Cash \( 7,500 \) 6,500 Accounts Receivable 21,000 17,500 Merchandise Inventory 20,000 30,000 Accounts Payable 15,000 19,000 Accumulated Depreciation— Equipment

2,000 Depr. Exp.

56,000 Jul. 1

58,000 Jul. 31

Retained Earnings

Dividends 15,000

63,000 Jul. 1

50,000 Net Inc.

98,000 Jul. 31

Compute CD’s net cash provided by (used for) operating activities during July 2018. Use the indirect method.

Using a spreadsheet to prepare the statement of cash flows—indirect method Use the Boost Plus, Inc. data in Exercise E14-21 to prepare the spreadsheet for the 2018 statement of cash flows. Format cash flows from operating activities by the indirect method.

Moss Exports is having a bad year. Net income is only \(60,000. Also, two important overseas customers are falling behind in their payments to Moss, and Moss’s accounts receivable are ballooning. The company desperately needs a loan. The Moss Exports Board of Directors is considering ways to put the best face on the company’s financial statements. Moss’s bank closely examines cash flow from operating activities. Daniel Peavey, Moss’s controller, suggests reclassifying the receivables from the slow-paying clients as long-term. He explains to the board that removing the \)80,000 increase in accounts receivable from current assets will increase net cash provided by operations. This approach may help Moss get the loan.

Requirements

  1. Using only the amounts given, compute net cash provided by operations, both without and with the reclassification of the receivables. Which reporting makes Moss look better?
  2. Under what condition would the reclassification of the receivables be ethical? Unethical?

Preparing operating activities using the direct method Amy’s Learning Center has assembled the following data for the year ended June 30, 2018:

Payments to suppliers $ 115,000

Cash payment for purchase of equipment 39,000

Payments to employees 66,000

Payment of notes payable 34,000

Payment of dividends 7,500

Cash receipt from issuance of stock 22,000

Collections from customers 188,000

Cash receipt from sale of land 58,000

Cash balance, June 30, 2017 41,000 Prepare the operating activities section of the business’s statement of cash flows for the year ended June 30, 2018, using the direct method.

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.
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