The net income reported on the income statement for the current year was $250,000. Depreciation recorded on fixed assets and amortization of patents for the year were $40,000 and $9,000, respectively. Balances of current asset and current liability accounts at the end and at the beginning of the year are as follows:



Cash
End $50,000
Beginning $60,000

Accounts receivable
End $112,000
Beginning $108,000

Inventories
End $105,000
Beginning $93,000

Prepaid expenses
End $4,500
Beginning $6,500

Accounts payable (merchandise creditors)
End $75,000
Beginning $89,000

What is the amount of cash flows from operating activities reported on the statement of cash flows prepared by the indirect method?
I think the answer is $271,000, but I am not sure, can I please get some help on this one?

I took 60,000 -50,000 = 10,000
112,000 - 108,000 = 4,000
105,000 - 93,000 = 12,000
4,500 - 6,500 = 2,000
then I took 250,000+ 40,000 + 9,000 = 299,000
then 299,000 - 10,000 - 4,000 -12,000 -2,000 = 271,000

No, it's incorrect. If you would post how you got to this answer, I could tell you where you went wrong.

Quote:

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Originally Posted by morgaine300

No, it's incorrect. If you would post how you got to this answer, I could tell you where you went wrong.

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I took 60,000 -50,000 = 10,000
112,000 - 108,000 = 4,000
105,000 - 93,000 = 12,000
4,500 - 6,500 = 2,000
then I took 250,000+ 40,000 + 9,000 = 299,000
then 299,000 - 10,000 - 4,000 -12,000 -2,000 = 271,000

Quote:

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Originally Posted by maltal

The net income reported on the income statement for the current year was $250,000. Depreciation recorded on fixed assets and amortization of patents for the year were $40,000 and $9,000, respectively. Balances of current asset and current liability accounts at the end and at the beginning of the year are as follows:



Cash
End $50,000
Beginning $60,000

Accounts receivable
End $112,000
Beginning $108,000

Inventories
End $105,000
Beginning $93,000

Prepaid expenses
End $4,500
Beginning $6,500

Accounts payable (merchandise creditors)
End $75,000
Beginning $89,000

What is the amount of cash flows from operating activities reported on the statement of cash flows prepared by the indirect method?
I think the answer is $271,000, but I am not sure, can I please get some help on this one?

I took 60,000 -50,000 = 10,000
112,000 - 108,000 = 4,000
105,000 - 93,000 = 12,000
4,500 - 6,500 = 2,000
then i took 250,000+ 40,000 + 9,000 = 299,000
then 299,000 - 10,000 - 4,000 -12,000 -2,000 = 271,000

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I took 60,000 -50,000 = 10,000
112,000 - 108,000 = 4,000
105,000 - 93,000 = 12,000
4,500 - 6,500 = 2,000
then I took 250,000+ 40,000 + 9,000 = 299,000
then 299,000 - 10,000 - 4,000 -12,000 -2,000 = 271,000

Actually, your answer was correct... I'm not sure what I did when I figured this out the first time. (I screwed up. :-)) But maybe it was fate, because you've actually done it incorrectly and still gotten the correct answer. So we need to straighten out the method anyway. This is such a weird coincidence that you could make 3 errors and have it net out the same way.

First, don't mess with the cash at all. Remember, the entire cash flow statement is that 10,000 difference in cash. i.e. when you finish the operating, investing and financing sections, that will net out to the 10,000 decrease, but that 10,000 will not be in any of the 3 sections. It's like the "answer" to the whole cash flow. (After all, it's a cash flow, telling where that 10,000 came from or went to. Since you're only doing one section, you'll never end up at 10,000.)

Second, the 2000 is a plus. It looks like you've just subtracted all the differences in current assets. But you don't just subtract them all. You have to look at whether the account balance went up or down. Notice the prepaid expenses went the opposite direction of the receivables and inventory, so it has to do something different on the cash flow statement. It's supposed to be a plus, not a minus.

Third, you missed the accounts payable altogether. That's a 14,000 difference and it's a minus.

Interesting, your wrong numbers of -10,000 - 2000 = -12,000
equals the correct numbers +2000 - 14,000 = -12,000

Very weird coincidence indeed.

Anyway, here's the rules:
1) ADD depreciation and amortization.
2) ADD losses and SUBTRACT gains (which you don't have any of)
3) Current Assets: ADD a decrease in balance, SUBTRACT an increase in balance
4) Current Liabilities: SUBTRACT a decrease in balance, ADD an increase in balance

Go through those rules and you should see what I'm talking about above. Also, if you can see the pattern in those rules, it's easier to memorize.