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Chapter 23: Q10Q (page 1372)

Broussard Company reported net income of \(3.5 million in 2017. Depreciation for the year was \)520,000, accounts receivable increased \(500,000, and accounts payable increased \)300,000. Compute net cash flow from operating activities using the indirect method.

Short Answer

Expert verified

Net cash flow from operating activities is $3,820,000.

Step by step solution

01

Meaning of Operating activities.

Cash flows are categorized as operating exercises within the statement of cash flows. The foremost revenue-generating activities of trade are those categorised under this heading; in this manner, cash flows are typically connected to revenues and expenses.

02

Computing net cash flow from operating activities.

$3,820,000 in net cash flow was generated by operating activities. The answer, using the indirect approach, is:

Net income

$3,500,000

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation expense $ 520,000

Accounts receivable increase (500,000)

Accounts payable increase 300,000

320,000

Net cash provided by operating activities

$3,820,000

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Most popular questions from this chapter


Question: (SCF Theory and Analysis of Transactions) Ashley Company is a young and growing producer of electronic measuring instruments and technical equipment. You have been retained by Ashley to advise it in the preparation of a statement of cash flows using the indirect method. For the fiscal year ended October 31, 2017, you have obtained the following information concerning certain events and transactions of Ashley.

1. The amount of reported earnings for the fiscal year was \(700,000, which included a deduction for a loss of \)110,000 (see item 5 below).

2. Depreciation expense of \(315,000 was included in the income statement.

3. Uncollectible accounts receivable of \)40,000 were written off against the allowance for doubtful accounts. Also, \(51,000 of bad debt expense was included in determining income for the fiscal year, and the same amount was added to the allowance for doubtful accounts.

4. A gain of \)6,000 was realized on the sale of a machine. It originally cost \(75,000, of which \)30,000 was undepreciated on the date of sale.

5. On April 1, 2017, lightning caused an uninsured building loss of \(110,000 (\)180,000 loss, less reduction in income taxes of \(70,000). This loss was included in determining income as indicated in item 1 above.

6. On July 3, 2017, building and land were purchased for \)700,000. Ashley gave in payment \(75,000 cash, \)200,000 market price of its unissued common stock, and signed a \(425,000 mortgage note payable.

7. On August 3, 2017, \)800,000 face value of Ashley’s 10% convertible debentures was converted into $150,000 par value of its common stock. The bonds were originally issued at face value.

Instructions

Explain whether each of the seven numbered items above is a cash inflow or outflow, and explain how it should be disclosed in Ashley’s statement of cash flows for the fiscal year ended October 31, 2017. If any item is neither an inflow nor an outflow of cash, explain why it is not, and indicate the disclosure, if any, that should be made of the item in Ashley’s statement of cash flows for the fiscal year ended October 31, 2017.

Differentiate between the direct method and the indirect method by discussing each method

For purposes of the statement of cash flows, under IFRS interest paid is treated as:

  1. an operating activity in all cases.
  2. an investing or operating activity, depending on use of the borrowed funds.
  3. either a financing or investing activity.
  4. either an operating or financing activity, but treated consistently from period to period.

Question: The Procter & Gamble Company (P&G)

The financial statements of P&G are presented in Appendix B. The company’s complete annual report, including the notes to the financial statements, is available online.

Instructions

Refer to P&G’s financial statements and the accompanying notes to answer the following questions.

(a) Which method of computing net cash provided by operating activities does P&G use? What were the amounts of net cash provided by operating activities for the years 2012, 2013, and 2014? Which two items were most responsible for the decrease in net cash provided by operating activities in 2014?

(b) What was the most significant item in the cash flows used for investing activities section in 2014?

What was the most significant item in the cash flows used for financing activities section in 2014?

(c) Where is “deferred income taxes” reported in P&G’s statement of cash flows? Why does it appear in that section of the statement of cash flows?

(d) Where is depreciation reported in P&G’s statement of cash flows? Why is depreciation added to net income in the statement of cash flows?

The following data are taken from the records of Alee Company

December 31, December 31,

2017 2016

Cash \( 15,000 \) 8,000

Current assets other than cash 85,000 60,000

Long-term debt investments 10,000 53,000

Plant assets 335,000 215,000

\(445,000 \)336,000

December 31, December 31,

2017 2016

Accumulated depreciation \( 20,000 \) 40,000

Current liabilities 40,000 22,000

Bonds payable 75,000 –0–

Common stock 254,000 254,000

Retained earnings 56,000 20,000

\(445,000 \)336,000

Additional information:

1. Held-to-maturity securities carried at a cost of \(43,000 on December 31, 2016, were sold in 2017 for \)34,000. The loss (not unusual) was incorrectly charged directly to Retained Earnings.

2. Plant assets that cost \(50,000 and were 80% depreciated were sold during 2017 for \)8,000. The loss was incorrectly charged directly to Retained Earnings.

3. Net income as reported on the income statement for the year was \(57,000.

4. Dividends paid amounted to \)10,000.

5. Depreciation charged for the year was $20,000.

Instructions

Prepare a statement of cash flows for the year 2017 using the indirect method
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