Using the following data, prepare the operating activities section of a statement of cash flows for Maximum Corporation for the year ended December 31, 20X6, using the indirect method. Increase in salary payable $1,50 Decrease in accounts payable 2,0000 Increase in accounts receivable 3,500 Net income 98,00 Decrease in inventory 5,800 Increase in prepaid expenses 1,200 Depreciation expense – equipment 5,000 Depreciation expense – building 7,500 Gain on sale of equipment 1,300 Loss on sale of patent 2,500
Question 1
Using the following data, prepare the operating activities section of a statement of
Maximum Corporation for the year ended December 31, 20X6, using the indirect method.
Increase in salary payable $1,50
Decrease in accounts payable 2,0000
Increase in
Net income 98,00
Decrease in inventory 5,800
Increase in prepaid expenses 1,200
Depreciation expense – equipment 5,000
Depreciation expense – building 7,500
Gain on sale of equipment 1,300
Loss on sale of patent 2,500
Question 2
A. In the long run it is more important for a business to have positive cash flows from its
operating activities, investing activities or financing activities? Why?
B. Identify three factors that may cause net income to differ from net cash flows from operating
activities.
C. Describe how the Statement of Cash Flows helps investors and creditors perform each of
the following functions: predict future cash flows; evaluate management decisions; predict
the ability to make debt payments to lenders and pay dividends to stockholders.
D. Name and explain the three (3) categories of cash-flow activities?
Cash flows from operating activities: It is a section of the Statement of cash flow that explains the sources and uses of cash from the regular/day-to-day business activities. This is the first section of the Statement of Cash Flows.
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