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Chapter 5: Q22Q. (page 238)

The net income for the year for Genesis, Inc. is \(750,000, but the statement of cash flows reports that the net cash provided by operating activities is \)640,000. What might account for the difference?

Short Answer

Expert verified

Net income reported by the business entity is higher than the net cash from operating activities because of large credit sales and higher payments to accounts payable.

Step by step solution

01

Definition of Cash Basis of Accounting

The accounting method of reporting all the financial information that includes the cash flow either inward or outward is known as the cash basis of accounting.Non-cash transactions are not included in this method of accounting.

02

Reason for Difference between the Net Income and Cash Provided by Operating Activities

There are two reasons for the difference between the net income and the net cash from operation:

  1. Higher credit sales or increase in receivables.
  2. Repayment of accounts payable or reduction in payables.

Higher credit sales will increase the net income of the business entity and will not affect the cash from operations. The reduction in payables will reduce the money from the process and will not affect the net income of the business entity.

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Most popular questions from this chapter

What is the relationship between current assets and current liabilities?

BE5-1 (L03) Harding Corporation has the following accounts included in its December 31, 2017, trial balance: Accounts Receivable \(110,000, Inventory \)290,000, Allowance for Doubtful Accounts \(8,000, Patents \)72,000, Prepaid Insurance \(9,500, Accounts Payable \)77,000, and Cash $30,000. Prepare the current assets section of the balance sheet, listing the accounts in proper sequence.

E5-8 (L02) (Current vs. Long-term Liabilities) Frederic Chopin Corporation is preparing its December 31, 2017, balance sheet. The following items may be reported as either a current or long-term liability.

1. On December 15, 2017, Chopin declared a cash dividend of \(2.50 per share to stockholders of record on December 31. The dividend is payable on January 15, 2018. Chopin has issued 1,000,000 shares of common stock, of which 50,000 shares are held in treasury.

2. At December 31, bonds payable of \)100,000,000 are outstanding. The bonds pay 12% interest every September 30 and mature in installments of \(25,000,000 every September 30, beginning September 30, 2018.

3. At December 31, 2016, customer advances were \)12,000,000. During 2017, Chopin collected \(30,000,000 of customer advances; advances of \)25,000,000 should be recognized in income.

Instructions For each item above, indicate the dollar amounts to be reported as a current liability and as a long-term liability if any.

Perez Company reported an increase in inventories in the past year. Discuss the effect of this change on the current ratio (current assets ÷ current liabilities). What does this tell a statement user about Perez Company’s liquidity?

(L03) Harding Corporation has the following accounts included in its December 31, 2017, trial balance: Accounts Receivable \(110,000, Inventory \)290,000, Allowance for Doubtful Accounts \(8,000, Patents \)72,000, Prepaid Insurance \(9,500, Accounts Payable \)77,000, and Cash $30,000. Prepare the current assets section of the balance sheet, listing the accounts in proper sequence.
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