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Reconciling items for indirect cash flow presentation

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The ability to manage cash flow is essential for businesses. Many small businesses fail because they are unable to manage the ups and downs of periodic cash flows. Listed below are items that a corporation gave up in order to receive cash.

For each item listed in the first column, describe the effect on the elements of each financial statement using the format shown. Indicate "NE" for no effect. An example transaction has been completed for you. The increases to cash have already been recorded.

1. Why is an increase in accounts receivable a subtraction when adjusting from net income to operating cash flow?
2. Why is a decrease in accounts payable a subtraction when adjusting from net income to operating cash flow?

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See the attached file for the table.

1. Why is an increase in accounts receivable a subtraction when adjusting from net income to operating cash flow?

An increase in AR results because what is billed was greater than what was collected. Billings were recorded in ...

Solution Summary

Your schedule is completed with explanations of why the YES and NO comments are entered and a few sentences explain the reconciling of AR and AP in the indirect operating cash flows.

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See Also This Related BrainMass Solution

Statement of cash flow

Saferoad Corporation has completed its comparative balance sheet and income statement at year-end 2009. Additional information:
?   A payment of 57,500 was made on the loan principal during the year.
?   Just before year-end, a dividend was distributed to stockholders.
?   A parcel of land was acquired early in the year.
?   New shares of common stock were sold during the year.

Comparative Balance Sheet 31-Dec
2009 2008
Cash $1,090 $4,000
Accounts receivable $2,910 $6,150
Inventory $4,800 $3,880
Prepaid advertising $700 $1,775
Buildings and furnishings $40,000 $40,000
Accumulated depreciation ($10,000) ($8,000)
Land $27,000 $15,000
TOTAL ASSETS $66,500 $62,805
Rent payable $2,000 $4,000
Taxes payable $1,900 $1,500
Wages payable $3,300 $2,200
Loan payable, long-term $19,600 $26,805
Common stock $31,000 $25,000
Retained earnings $8,700 $3,300
TOTAL LIABILITIES AND EQUITY $66,500 $66,500 $62,805

Income Statement for 2009
Sales Revenue $350,000
Cost of goods sold $250,600
Gross profit $99,400
Operating expenses:
Advertising $9,500
Depreciation $2,000
Insurance $4,100
Rent $28,900
Wages $40,450
Operating income $14,450
Interest expense $1,600
Income before tax $12,850
Taxes $3,850
Net Income $9,000

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