Chapter 16, Problem 16.15EX

a.

To determine

Statement of cash flows: It is one of the financial statement that shows the inflows and outflows of cash and cash equivalents of a company for a particular period. It determines the net changes in cash through reporting the sources and uses of cash due to the operating, investing, and financing activities of a company.

Indirect method: Under this method, different items are adjusted from the net income to calculate the net cash provided from operating activities and the amount is further adjusted with cash flows from investing and financing activities to finally arrive at the closing balance of cash.

Cash flows from operating activities: These are the cash generated from the normal business operations.

The below table shows the way of calculation of cash flows from operating activities:

Cash flows from operating activities (Indirect method)

Net Income                                                             xxxxx

Add: Decrease in current assets

Increase in current liability

Depreciation expense and amortization expense

Loss on sale of plant assets

Deduct: Increase in current assets

Decrease in current liabilities

Gain on sale of plant assets

Net cash provided from or used by operating activities

Table (1)

The net income reported by C Incorporation for the year ended December 31. 

b.

To determine

To Explain: Why net income is different from net cash flow from operating activities.