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B proceedsfromsaleoffixedassetsiscomputedasfollows

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Unformatted text preview: ary expense Since no related balance sheet account exists as of December 31, 2011 or as of December 31, 2012, it is safe to assume that the entire balance in Salary Expense was paid in cash. Therefore, the cash paid for salaries equals \$250,000. Supplies expense 2012 Ending office supply inventory = \$75,000 Office supply purchases = = 2012 Beginning office supply inventory + Office supplies purchased during 2012 – 2012 Office supplies expense \$85,000 + Supplies purchased – \$175,000 \$165,000 Depreciation expense Depreciation is the allocation of the cost of a fixed asset. Depreciation does not provide cash or use cash; hence, the cash flow associated with depreciation is zero. Insurance expense 2012 Ending prepaid insurance \$50,000 Insurance purchases = 2012 Beginning prepaid insurance + Insurance purchased during 2012 – 2012 Insurance expense = \$10,000 + Insurance purchased – \$60,000 = \$100,000 P14–15 Concluded Rent Expense 2012 Ending rent payable \$20,000 Rent paid = 2012 Beginning rent payable + 2012 Rent expense – Rent paid during 2012 = \$8,000 + \$120,000 – Rent paid = \$108,000 This method would be similar to directly computing net cash flow from operating activities since the actual cash flow for each component of operating activities is being computed. Under the indirect method, net cash flow from operating activities is computed by adjusting net income. b. Net income 295,000 Adjustments: Depreciation expense Decrease in office supplies inventory Increase in rent payable Increase in accounts receivable Increase in prepaid insurance Total adjustments 37,000 Net cash increase due to operating activities 332,000 \$ \$ 100,000 10,000 12,000 (45,000) (40,000) \$ This method is similar to the indirect method since net income is adjusted for the change in each operating account on the balance sheet to arrive at cash flows from operating activities. The magnitudes of these adjustments are the same as in part (a). However, in part (a) each of these adjustments was related to an individual operating activity to determine the actual cash inflow or actual cash outflow associated with the individual operating activity; whereas in part (b) each adjustment is related to net income to arrive at the overall net cash flow associated with all operating activities. c. Operating Cash Flows Income Statement Direct Method Marketing revenue accts. receivable Salary expense \$ \$(45,000) Office supplies exp. office supplies Adjustments 1,0...
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