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Homework Answers
a)Under Indirect method of cash flow statement ,Net income is taken as a base for calculation of cash flow from operating activity .Income statement is prepared on basis of accrual concept which takes in to account both cash and non cash item in preparation of Income statement .
| Action | Reason | |
| Depreciation expense | Added to | Non cash item which is subtracted while calculating net income |
| Gain on sale of long term asset | Subtracted from | Notional gain which is added to net income therefore while calculating cash flow ,it is subtracted |
| Loss on sale of Long term asset | Added to | Notional loss which is subtracted from net income therefore while calculating cash flow ,it is added back |
| Increase in short term liabilities | Added to | Increase in liabilities means less cash is paid to creditors than incurred so added back |
| Decrease in short term asset | Added to | Decrease in current asset means cash is released from asset invested therefore added |
| Decrease in short term liabilities | Subtracted from | Decrease in current liabilities means more cash is paid than incurred |
| Increase in short term asset | subtracted from | Increase in asset means more investment is made thus cash is blocked. |
b)
| Cash flow from operating activities | |
| Net Income | 100000 |
| Depreciation expense | 14000 |
| Loss on sale of equipment | 1000 |
| Increase in accounts payable | 7000 |
| Decrease in accounts receivable | 5000 |
| Increase in inventory | -6000 |
| Decrease in unearned revenue | -2000 |
| Net Increase/(decrease )from operating activities | 119000 |
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The first image is the original question, the second shows the
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