Exam 12: How Is the Statement of Cash Flows Prepared and Used

When preparing the operating activities section of the statement of cash flows using the indirect method,increases in current assets are added to net income.

Exhibit 12-3 Stalwart Inc. accounting records show the following changes during the company's most recent fiscal year. 1.Gain on sale of 2.Loss on sale of long-term investments 3.Decrease in prepaid expenses 4.Increase in accounts receivable 5.Decrease in merchandise inventory 6.Decrease in wages payable 7.Increase in accounts payable 8.Payment of cash dividends 9.Purchase of machinery 10.Payments of principal on bonds payable 11.Proceeds from sale of long-term investments -Refer to Exhibit 12-3.Which of these would be added as part of the cash flows from investing activities when preparing the statement of cash flows?

Exhibit 12-4 Manning Company uses the indirect method to prepare the statement of cash flows.The following amounts are shown in its December 31,2017,financial statements. December 31, 2017 December 31, 2016 Accourts receivable \ 663,000 \ 600,000 Cost of goods sold \ 1,800,000 Sales reveruse \ 2,400,000 Accourts payable \ 255,000 \ 195,000 Irventory \ 270,000 \ 375,000 Salaries payable \ 45,000 \ 30,000 Salaries expense \ 165,000 \ 144,000 -Refer to Exhibit 12-4.How will the change in accounts payable be reported in the operating activities section of the statement of cash flows?

Factory equipment sold for cash would appear in the financing activities section of the statement of cash flows.

eBook Company's most recent balance sheet,income statement,and other important information for 2017 are presented below. eBook Company Income Statement For the Year Ended December 31, 2017 Sales \ 1,960,000 Cost of goods sold Gross margin 756,000 Operating expenses 270,000 Depreciation expense Operating income 226,000 Interest expense (26,000) Gain on sale of equipment 40,000 Loss on sale of long-term investments Income before taxes 234,000 Income tax expense Net income Additional data for 2017 Sold equipment with a book value of $38,000 (= $198,000 cost * $160,000 accumulated depreciation)for $78,000 cash. Purchased equipment for $278,000 cash. Sold long-term investments for $74,000 cash.These investments had an original cost of $80,000. Purchased long-term investments for $10,000 cash. Issued bonds for $186,000 cash. Issued common stock for $22,000 cash. Declared and paid $52,000 in cash dividends. Prepare a statement of cash flows for the year ended December 31,2017,using the indirect method. The owner of eBook Company wants to know why cash decreased from $720,000 to $590,000 given the company's net income of $74,000.Use the information in the statement of cash flows to briefly explain why cash decreased.

The operating cash flow ratio measures: