Company reports net income of $ 530,000 for the year ended December 31, 2009. It also reports $ 95,400 depreciation expense and a $ 4,000 gain on the sale of machinery. Its comparative balance sheets reveal a $ 42,400 increase in accounts receivable, $21,730 increase in accounts payable, $ 11,660 decrease in prepaid expenses, and $16,430 decrease in wages payable.
Prepare only the operating activities section of the statement of cash flows for 2009 using the indirect method.(8 points).
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530000+95400-4000-42400+21730+11660-16430
h a m z a n a j a m @ h o t m a i l . c o m
To prepare the operating activities section of the statement of cash flows using the indirect method, we need to analyze the changes in the company's balance sheet accounts that are related to operating activities.
Here are the steps to prepare the operating activities section:
Step 1: Start with net income
Begin with the net income for the year, which is $530,000.
Step 2: Adjust for non-cash items
Add back any non-cash expenses or losses, and subtract any non-cash revenues or gains. In this case, we have:
- Depreciation expense of $95,400 (add back)
- Gain on the sale of machinery of $4,000 (subtract)
Adjusted net income (before changes in working capital) = Net income + Depreciation expense - Gain on the sale of machinery
= $530,000 + $95,400 - $4,000
= $621,400
Step 3: Analyze changes in working capital accounts
Now, we need to analyze the changes in the company's balance sheet accounts related to working capital. In this case, we have:
- Increase in accounts receivable: $42,400 (subtract)
- Increase in accounts payable: $21,730 (add back)
- Decrease in prepaid expenses: $11,660 (add back)
- Decrease in wages payable: $16,430 (subtract)
Adjusted net income after changes in working capital = Adjusted net income (before changes in working capital) - Increase in accounts receivable - Decrease in prepaid expenses + Increase in accounts payable - Decrease in wages payable
= $621,400 - $42,400 - $11,660 + $21,730 - $16,430
= $572,640
Step 4: Prepare the operating activities section
Finally, we can prepare the operating activities section of the statement of cash flows using the information obtained:
Operating Activities:
Net income: $530,000
Add back depreciation expense: $95,400
Subtract gain on the sale of machinery: $4,000
Increase in accounts payable: $21,730
Add back decrease in prepaid expenses: $11,660
Subtract decrease in wages payable: $16,430
Adjusted net income after changes in working capital: $572,640
Therefore, the operating activities section of the statement of cash flows for 2009 using the indirect method would look like this:
Operating Activities:
Net income: $530,000
Add back depreciation expense: $95,400
Subtract gain on the sale of machinery: $4,000
Increase in accounts payable: $21,730
Add back decrease in prepaid expenses: $11,660
Subtract decrease in wages payable: $16,430
Adjusted net income after changes in working capital: $572,640