Statement of Cash Flows Preparation and Explanation
Tiger Enterprises Statement of Cash Flows
Net income: $1,308
Adjustment to reconcile net income:
+ Depreciation: $270
+ Decrease in accounts receivable: $95
+ Increase in income tax payable: $35
- Increase in inventory: ($55)
- Increase in prepaid insurance: ($45)
- Decrease in accounts payable: ($75)
- Decrease in other expenses payable: ($115)
Net cash flow from operating activities: $1,418
Cash flow from investing activitiesAcquisition of Plant, Property & Equipment: ($450)
Net cash flow from investing activities: ($450)
Cash flow from financing activitiesProceeds from notes payable: $230
Proceeds from issuance of common stock: $130
Payment of dividends: ($1,198)
Net cash flow from financing activities: ($838)
Total cash flow increase: $130Cash balance December 31, 2017: $230
Cash balance December 31, 2018: $360
The Indirect Method for the Statement of Cash Flow involves adjusting the Net Income with changes in balance sheet items, which includes addition or deduction based on the increase or decrease in the corresponding account balances from the previous year.
To prepare Tiger Enterprises' statement of cash flows using the indirect method, we start with the net income and add or subtract changes in the balance sheet accounts.
Explanation:
Cash: $360 - $230 (+$130 change)
Net income: $1,308
Depreciation: $270
Accounts receivable: -$95 change
Inventory: +$55 change
Prepaid insurance: +$45 change
P, P & E: +$450 change
Accounts payable: -$75 change
Other expenses payables: -$115 change
Income tax payable: +$35 change
Notes payable: +$230 change
Common stock: +$130 change
Retained earnings: +$110 change
Dividends paid: $1,198 (Net income - change in retained earnings)
The change in Retained Earnings is the Net Income minus Dividends. Using algebra, we know that Dividends equals Net Income minus the change in Retained Earnings. In this case, Dividends = $1,308 - ($605 - $495) = $1,198. Subtract this.
After executing these steps, you will get the net cash provided by operating activities.
Final answer:
The preparation of Tiger Enterprises' statement of cash flows involves adjusting the Net Income with changes in balance sheet items and analyzing the changes in various accounts to determine the cash flow from operating, investing, and financing activities. This process provides insights into the company's liquidity and financial health.