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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

Question: Preparing operating activities cash flow—direct method

The accounting records of Four Seasons Parts reveal the following:

Payment of salaries and wages \( 34,000

Net income \) 21,000

Depreciation expense 10,000

Payment of income tax 16,000

Payment of interest 17,000

Collection of dividend revenue 5,000

Payment of dividends 5,000

Payment to suppliers 51,000

Collections from customers 116,000

Compute cash flows from operating activities using the direct method for the year ended December 31, 2018.

Question: Muench, Inc.’s accountant has partially completed the spreadsheet for the statement of cash flows. Fill in the remaining missing information.

Question: What does the statement of cash flows report?

Question: Preparing the statement of cash flows—direct 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’s statement of cash flows for the year ended June 30, 2018. Use the direct method.

Use the Rouse Exercise Equipment data in Exercise E14-23. Prepare the company’s statement of cash flows—indirect method—for the year ended December 31, 2018. Assume investments are purchased with cash.
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