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Cash Flow from Operating Activities (Indirect Method) The following information was obtained from Melville Company's comparative balance sheets: Beginning End of Year of Year $9,000 35,000 Cash $19,000 Accounts receivable 50,000 Inventory 55,000 Prepaid rent 6,000 Long-term investments 21,000 Plant assets 140,000 Accumulated depreciation (42,000) Accounts payable 24,000 Income tax payable 4,000 Common stock 127,000 Retained earnings 106,000 Capital expenditures 15,200 49,000 8,000 32,000 106,000 (32,000) 22,000 6,000 92,000 91,000 Assume that Melville Company's income statement showed depreciation expense of $10,000, a gain on sale of investments of $7,000, and a net income of $60,000
Cash Flow from Operating Activities (Indirect Method) The following information was obtained from Melville Company's comparative balance sheets: Beginning End of Year of Year $9,000 35,000 Cash $19,000 Accounts receivable 50,000 Inventory 55,000 Prepaid rent 6,000 Long-term investments 21,000 Plant assets 140,000 Accumulated depreciation (42,000) Accounts payable 24,000 Income tax payable 4,000 Common stock 127,000 Retained earnings 106,000 Capital expenditures 15,200 49,000 8,000 32,000 106,000 (32,000) 22,000 6,000 92,000 91,000 Assume that Melville Company's income statement showed depreciation expense of $10,000, a gain on sale of investments of $7,000, and a net income of $60,000. (a) Calculate the cash flow from operating activities using the indirect method and (b) compute Melville's operating-cash-flow-to-capital-expenditures ratio.
a. Use negative signs with cash outflow answers. Cash Flow from Operating Activities Net Income $ 51,000 x Add (deduct) items to convert net income to cash basis Depreciation Gain on sale of investments Accounts Receivable Increase T Inventory Increase Prepaid Rent Decrease Accounts Payable Increase Income Tax Payable Decrease Cash Provided by Operating Activities 10,000 7,000 x 9,000 x 6,000 x 2,000 4,000 x 2,000 x 43,000 x $ b. Operating cash-flow-to capital expenditures ratio (Round answer to two decimal points) 3.257
Expert Solution
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a.
Cash Flow from Operating Activities Net Income $60,000 Add (deduct) items to convert net income to cash basis Depreciation $10,000 Gain on sale of investments ($7,000) Accounts Receivable ($35,000 - $50,000) Increase ($15,000) Inventory ($49,000 - $55,000) Increase ($6,000) Prepaid Rent ($8,000 - $6,000) Decrease $2,000 Accounts Payable ($22,000 - $24,000) Increase $2,000 Income Tax Payable ($6,000 - $4,000) Decrease ($2,000) Cash provided by Operating Activities $44,000 b.
Operating cash-flow-to capital expenditures ratio 2.89 Explanation:
Operating cash-flow-to capital expenditures ratio = Operating cash flow/ capital expenditure Operating cash-flow-to capital expenditures ratio = $44,000/ 15,200 Operating cash-flow-to capital expenditures ratio = 2.89
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