Question

Arundel Company disclosed the following information for its recent calendar year

Income Statement Data		Selected Year-End Balance Sheet Data
Revenues	\(100,000	Accounts receivable decrease	\)24,000
Expenses		Purchased a machine for cash	10,000
Salaries expense	84,000	Salaries payable increase	18,000
Utilities expense	14,000	Other accrued liabilities decrease	8,000
Depreciation expense	14,600
Other expenses	3,400
Net loss	$ (16,000)

Required

1. Prepare the operating activities section of the statement of cash flows using the indirect method.
2. What were the major reasons that this company was able to report a net loss but positive cash flow from operations?
3. Of the potential causes of differences between cash flow from operations and net income, which are the most important to investors?

Short answer

1. Net cash provided by operating activities is $32,600
2. The major reasons are depreciation expense, decrease in accounts receivable and increase in salaries payable.
3. The management of operating activities and how income and expenses are recognized have changed.

Step-by-step solution

Meaning of Operating activities

Operating activities are the primary business pursuits that directly affect the provision of goods or services. Examples are manufacturing, distribution, marketing, and selling processes for goods and services.

(1) Preparing the operating activities

Arundel Company
Statement of Cash Flows—Operating Section under Indirect Method
Net Income (loss)	$(16,000)
Income statement items not affecting cash
Depreciation expense	$14,600
Changes in current assets and liabilities
Accounts receivable decrease	$24,000
Salaries payable increase	$18,000
Other accrued liabilities decrease	$(8,000)
Net cash provided by operating activities	$32,600

(2) Explaining the reason behind the company was able to report a net loss but positive cash flow from operations.

Depreciation costs were one factor in the net loss. Depreciation expense is added to net income to account for the impacts of a noncash item subtracted from net income. It doesn't involve a financial influx. The net loss was transformed into the positive operating cash flow through depreciation expense, a rise in salaries due, a decline in accounts receivable, and other factors.

(3) Explaining the activities which are most important to investors

Different factors may contribute to discrepancies between operating cash flow and net income. Differences resulting from (1) altered operating activity management and (2) altered revenue and cost recognition are the main causes for investors. The investors will use these information for the analysis of the cash generated by operations.