Chap 12 Review problem to understand Indirect method of Statement of Cash flows

ANSWERS ABC Tax preparation business is starting operations on January 1 st

with cash invested by owners
of $10,000.
The following transactions happened in the first month:
1. Cash received for walk in tax return preparation $5,000
2. Tax return preparation on account $4,000
3. Wages for the month paid in cash $2,000
4. Utility bill for January received to be paid in February $1,000
5. Monthly depreciation on computer recorded $500
T-Accounts:
_____CASH_____ _____REVENUE_____ ____A/R____ _____A/P_____ ____WAGE EXP____

10,000

_____UTIL EXP____ _____DEP EXP______ _____ACCUM DEP____

Net Income for January :

Tax Prep Revenue $9,000

Wage expense 2,000
Utility Expense 1,000
Depreciation expense 500
Total expenses 3,500
Net Income $5,500

Statement of Cash flow from OPERATING ACTIVITIES – Direct Method

Cash Inflow from Customers $5,000

Cash outflow for wages (2,000)
Net change in cash from Operating activities 3,000
Beginning Cash January 1st $10,000
Ending Cash January 31st $13,000

Statement of Cash flow from OPERATING ACTIVITIES – Indirect Method

Net Income $5,500

Adjustments to reconcile net income to cash flow from operations:

Depreciation ( non cash item) +500

Changes in Current Assets and Liabilities:
Accounts receivable (increased) (4,000)
Accounts payable +1000
Net change in cash from Operating activities 3,000
Beginning Cash January 1st $10,000
Ending Cash January 31st $13,000