Q20E - Horngren'S Financial And Managerial Accounting

Question

Computing operating activities cash flow—indirect method 

The accounting records of CD Sales, Inc. include the following accounts: Account                             Beginning Balance         Ending Balance Cash                                                    \( 7,500                                \) 6,500                     Accounts Receivable                           21,000                                17,500 Merchandise Inventory                        20,000                                30,000        Accounts Payable                                15,000                            19,000     Accumulated Depreciation— Equipment 

2,000 Depr. Exp. 

56,000 Jul. 1  

58,000 Jul. 31 

Retained Earnings 

Dividends 15,000

63,000 Jul. 1

50,000 Net Inc. 

98,000 Jul. 31 

Compute CD’s net cash provided by (used for) operating activities during July 2018. Use the indirect method.

Step-by-Step Solution

Answer

Net cash provided by operating activities is $16,000.

Step-by-Step Solution Step 1: Cash flow from operating activities- Indirect method

Indirect method starts with net income and adjustments are made to reconcile net income to net cash provided by operating activities.

Step 2: Cash flow from operating activities

Cash flows from operating activities
Net Income		$50,000
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation expense	$2,000
Decrease in account receivables	$3,500
Increase in merchandise inventory	($10,000)
Increase in accounts payable	$4,000
Net cash provided by operating activities		$49,500