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Skysong, Inc. reported net income of $196,870 for 2017. Skysong, Inc. also reported depreciation expense of $36,940 and a loss of $4,720 on the disposal of plant assets. The comparative balance sheets show an increase in accounts receivable of $13,760 for the year, a $16,070 increase in accounts payable, and a $4,250 increase in prepaid expenses. Prepare the operating activities section of the statement of cash flows for 2017. Use the indirect method.

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Answer:

2017 Cashflows from operations Skysong, Inc.

                                                                         Amount in Dollars

Net earnings                                                      196,870.00  

Additions to cash  

Depreciation                                                       36,940.00  

Loss on asset disposal                                          4,720.00  

Increase in accounts receivable                         (13,760.00)

Increase in accounts payable                         16,070.00  

Increase in prepaid expenses                         (4,250.00)

 

Net cash flows from operating activities          236,590.00  

Explanation:

Using the Indirect method, Depreciation as a non cash item is added back to the net income. An increase in an asset is an outflow of cash while an increase in a liability is treated as an inflow of cash. Hence, operating activities section of the statement of cash flows for 2017 is as shown below;

                                                                         Amount in Dollars

Net earnings                                                      196,870.00  

Additions to cash  

Depreciation                                                       36,940.00  

Loss on asset disposal                                          4,720.00  

Increase in accounts receivable                         (13,760.00)

Increase in accounts payable                         16,070.00  

Increase in prepaid expenses                         (4,250.00)

 

Net cash flows from operating activities          236,590.00  

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