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Data for Krauss Company are presented in E23-5.

Instructions

Prepare the operating activities section of the statement of cash flows using the indirect method.

Short Answer

Expert verified

The net cash provided by operating activities is computed as $198,500.

Step by step solution

01

Definition of Indirect method

The indirect method of cash flow statement is defined as the method of preparing the statement of cash flow which starts from net income and it uses increases and decreases in balance sheet line items to modify the operating section of the cash flow.

02

Preparation statement of cash flow (partial)

KRAUSS COMPANY
Partial Statement of Cash Flows
For the year ended December 31, 2017

Net Income

$90,000

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

Depreciation expense

$60,000

Loss on sale of equipment

26,000

Decrease in accounts receivable

17,000

Increase in accounts payable

10,000

Decrease in income tax payable

-4,500

108,500

Net cash provided by operating activities

$198,500

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Most popular questions from this chapter

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to cash flow reporting.

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

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

Instructions

Refer to P&Gโ€™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 โ€œdeferred income taxesโ€ reported in P&Gโ€™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&Gโ€™s statement of cash flows? Why is depreciation added to net income in the statement of cash flows?

Dingel Corporation has contracted with you to prepare a statement of cash flows. The controller has provided the following information.

December 31

2017

2016

Buildings

\( โ€“0โ€“

\)29,750

Equipment

45,000

20,000

Patents

5,000

6,250

Investments

โ€“0โ€“

3,000

Inventory

12,000

9,000

Accounts receivable

12,250

10,000

Cash

33,500

13,000

\(107,750

\)91,000

Share capitalโ€”ordinary

\( 43,000

\)33,000

Retained earnings

20,750

6,000

Allowance for doubtful accounts

3,000

4,500

Accumulated depreciation on equipment

2,000

4,500

Accumulated depreciation on buildings

โ€“0โ€“

6,000

Accounts payable

5,000

3,000

Dividends payable

โ€“0โ€“

5,000

Long-term notes payable

31,000

25,000

Notes payable, short-term (non-trade)

3,000

4,000

\(107,750

\)91,000

Additional data related to 2017 are as follows.

  1. Equipment that had cost \(11,000 and was 40% depreciated at the time of disposal was sold for \)2,500.
  2. \(10,000 of the long-term notes payable was paid by issuing ordinary shares.
  3. Cash dividends paid were \)5,000.
  4. On January 1, 2017, the building was completely destroyed by a flood. Insurance proceeds on the building were \(32,000.
  5. Equity investments (non-trading) were sold at \)1,700 above their cost.
  6. Cash was paid for the acquisition of equipment.
  7. A long-term note for \(16,000 was issued for the acquisition of equipment.
  8. Interest of \)2,000 and income taxes of $6,500 were paid in cash.

Instructions Prepare a statement of cash flows using the indirect method.

Question:Comparative balance sheet accounts of Marcus Inc. are presented below.

MARCUS INC.

COMPARATIVE BALANCE SHEET ACCOUNTS

AS OF DECEMBER 31, 2017 AND 2016

December 31

2017 2016

Debit Accounts

Cash \( 42,000 \) 33,750

Accounts Receivable 70,500 60,000

Inventory 30,000 24,000

Equity investments 22,250 38,500

Machinery 30,000 18,750

Buildings 67,500 56,250

Land 7,500 7,500

\(269,750 \)238,750

Credit Accounts

Allowance for Doubtful Accounts \( 2,250 \) 1,500

Accumulated Depreciationโ€”Machinery 5,625 2,250

Accumulated Depreciationโ€”Buildings 13,500 9,000

Accounts Payable 35,000 24,750

Accrued Payables 3,375 2,625

Long-Term Notes Payable 21,000 31,000

Common Stock, no-par 150,000 125,000

Retained Earnings 39,000 42,625

\(269,750 \)238,750

Additional data (ignoring taxes):

1. Net income for the year was \(42,500.

2. Cash dividends declared and paid during the year were \)21,125.

3. A 20% stock dividend was declared during the year. \(25,000 of retained earnings was capitalized.

4. Equity investments (level of ownership is less than 20%) that cost \)25,000 were sold during the year for \(28,750. No unrealized gains and losses were recorded on these investments in 2017.

5. Machinery that cost \)3,750, on which \(750 of depreciation had accumulated, was sold for \)2,200. Marcusโ€™s 2017 income statement follows (ignoring taxes).

Sales revenue \(540,000

Less: Cost of goods sold 380,000

Gross margin 160,000

Less: Operating expenses (includes \)8,625 depreciation and \(5,400 bad debts) 120,450

Income from operations 39,550

Other: Gain on sale of investments \)3,750

Loss on sale of machinery (800) 2,950

Net income $ 42,500

Instructions

  1. Compute net cash flow from operating activities using the direct method.

(b) Prepare a statement of cash flows using the indirect method.

Question; In the case of a bank overdraft:

  1. GAAP typically includes the amount in cash and cash equivalents.
  2. IFRS typically includes the amount in cash equivalents but not in cash.
  3. GAAP typically treats the overdraft as a liability, and reports the amount in the financing section of the statement of cash flows.
  4. IFRS typically treats the overdraft as a liability, and reports the amount in the investing section of the statement of cash flows.
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