End of Year Beginning of Year
Cash $62,400 $57,600
Accounts receivable (net) 45,600 42,000
Merchandise inventory 60,000 66,000
Prepaid expenses 7,200 5,400
Accounts payable (merchandise creditors) 60,000 54,000
Wages payable 31,800 36,000
a. Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method.
b. Briefly explain why net cash flow from operating activities is different than net income.
Answer:
a. Net income……………………………………………………………… $600,000
Adjustments to reconcile net income to net cash
flow from operating activities:
Depreciation………………………………………………………
Changes in current operating assets and liabilities:
24,000
Increase in accounts receivable…………………………… (3,600)
Decrease in merchandise inventory……………………… 6,000
Increase in prepaid expenses……………………………… (1,800)
Increase in accounts payable……………………………… 6,000
Decrease in wages payable………………………………… (4,200)
Net cash flow from operating activities…………………………… $626,400
b. Cash flows from operating activities shows the cash inflow or outflow from a
company’s day-to-day operations. Net income reports the excess of revenues over
expenses for a company using the accrual basis of accounting. Revenues are
recorded when they are earned, not necessarily when cash is received. Expenses
are recorded when they are incurred and matched against revenue, not necessarily
when cash is paid. As a result, the cash flows from operating activities differs
from net income because it does not use the accrual basis of accounting.