Chapter 14: Q20E (page 776)

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.

Expert verified

Net cash provided by operating activities is $16,000.

Step by step solution

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

Cash flows from operating activities
Net Income		$50,000
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation expense	$2,000
Decrease in account receivables	$3,500
Increase in merchandise inventory	($10,000)
Increase in accounts payable	$4,000
Net cash provided by operating activities		$49,500

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ROUSE EXERCISE EQUIPMENT, INC. Income statement Year ended December 31, 2018
Net sales revenue	\(713,000
Cost of goods sold	342,000
Gross Profit	371,000
Operating expense:
Depreciation expense	54,000
Other operatin expenses	210,000
Net Income	\)107,000

ROUSE EXERCISE EQUIPMENT, INC. Comparative Balance sheet December 31, 2018 and 2017
	2018	2017
Assets
Current assets:
Cash	17,000	16,000
Accounts receivable	57,000	46,000
Merchandise inventory	79,000	90,000
Long term assets:
Plant assets	260,500	216,400
Accumulated depreciation-Plant assets	(38,500)	(32,400)
Investments	96,000	73,000
Total assets	\(471,000	\)409,000

Liabilities
Current liabilities
Accounts payable	72,000	71,000
Salaries payable	3,000	5,000
Long-term liabilities
Notes payable	61,000	69,000
Total liabilities	136,000	145,000

Stockholder’s equity
Common stock, no par	45,000	34,000
Retained earnings	290,000	230,000
Total stockholder’s equity	335,000	264,000
Total liabilities and stockholder’s equity	\(471,000	\)409,000