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ES Brief Exercise 12-06 The comparative balance sheets for Sheffield Corp
ES Brief Exercise 12-06 The comparative balance sheets for Sheffield Corp. show these changes in noncash current asset accounts: accounts receivable decrease $81,100, prepaid expenses increase $24,700, and inventories increase $33,400. Compute net cash provided by operating activities using the indirect method assuming that net income is $235,600. (Show amounts that decrease cash flow with either a - sign e.g.-15,000 or in parenthesis e.g. (15,000).) Sheffield Corp. Statement of Cash Flows-Indirect Method s Adjustments to reconcile net income to V V Click if you would like to Show Work for this question: Open Show Work vacy Policy | © 2000-2020 John Wiley & Sons, Inc. All Rights Reserved. A Division of John Wiley & Sons, Inc. Version 4.2
Expert Solution
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Sheffield Corp. |
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Statement of Cash Flows - Indirect method |
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Cash flows from operating activities |
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Net income |
$235,600 |
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Adjustments to reconcile net income to |
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Changes in working capital |
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Add:Decrease in accounts receivable |
$81,100 |
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Less:Increase in prepaid expenses |
-$24,700 |
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Less:Increase in inventories |
-$33,400 |
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$23,000 |
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Net cash provided by operating activities |
$258,600 |
Working notes:
1. Adjustments to net income to arrive at cash flow from operating activities included adding back non-cash items such as depreciation, gain/loss on sale of assets, etc. and further adjust the changes in working capital to arrive at net cash generated/lost in operating activities.
2. Decrease in accounts receivables (current asset) means accounts receivable got converted to cash, so cash will go up. Therefore, decrease in accounts receivable is added to net income.
3. Increase in prepaid expenses (current asset) means that cash is converted to prepaid expenses, so cash is reduced. Therefore, increase in prepaid expenses will be reduced from net income.
4. Similarly, increase in inventories (current asset) means cash is used up in inventories so cash is reduced. Hence, increase in inventories will be reduced from net income to arrive at cash flows from operating activities.
5. Net changes in working capital = $81,000 - $24,700 - $33,400 = $23,000
6. Net cash provided by operating activities = $235,600 + $23,000 = $258,600
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