FINANCIAL ACCOUNTING.

FINANCIAL ACCOUNTING
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FINANCIAL ACCOUNTING
Question 1
(a) The requisite cash flow statement using indirect method to indicate the cash flow
derived from operating activities is as indicated below.
Explanation:
1) Net profit = Profit before tax (after interest) – Tax paid = 185,000 – 50,000 = $135,000
2) Depreciation is added since it is a non-cash charge subtracted to obtain net income
3) Increase in inventories = 24,000 – 22,000 = $2,000
4) Increase in account receivables = 22,000 – 18,000 = $4,000
5) Increase in prepaid expenses is on account of interest paid being $26,000 when compared
to the interest expense of $21,000.
6) Increase in accounts payable = 18,000 – 15,000 = $3,000
b) Even though depreciation is added to the net income in determining the cash flow from
operating activities, it is not a source of cash. Depreciation is a non-cash expense which is
deducted during the computation of net income. Since depreciation does not involve any cash
outflow, hence adjustment is made whereby it is added back to the net income so as to
compensate for the deduction during income computation.
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