Explain is depreciation a source of cash flow

Reference no: EM13214960

1. What is the reporting purpose of the statement of cash flows? Identify at least two questions that this statement can answer.

2. What are some financing activities reported on the statement of cash flows?

3. Is depreciation a source of cash flow?

4. Salud company reports net income of $400,000 for the year ended December 31. It also reports $80,000 depreciation expense and a $20,000 gain on the sale of machinery. Its comparative balance sheets reveal a $40,000 increase in accounts receivable, $6,000 increase in accounts payable, $12,000 decrease in prepaid expenses, and $2,000 decrease in wages payable.
(1) Prepare only the operating activities section of the statement of cash flows using indirect method.

5. For each of the following three separate cases, use the information provided about the calendar year 2014 operation of Sahim Company to computer the required cash flow information.
Case X: Compute cash received from customers:
Sales 515,000
Accounts receivable Dec 31, 2013 27,200
Accounts receivable Dec 31, 2014 33,600
Case Y: Compute cash paid for rent:
Rent expense 139,800
Rent payable Dec 31, 2013 7,800
Rent payable Dec 31, 2014 6,200
Case Z: Compute cash paid for merchandise:
Cost of goods sold 525,000
Merchandise inventory Dec 31, 2013 158,600
Accounts payable Dec 31, 2013 66,700
Merchandise inventory Dec 31, 3014 130,400
Accounts payable Dec 31, 2014 82,000

6. Arundel Company disclosed the following information for its recent calendar year.
Revenues. 100,00
Expenses
Salaries expense 84,000
Utilities expense 14,000
Depreciation expense 14,600
Other expense 3,400
(Net Loss) (16,000)
=======
Accounts recievable decrease 24,000
Purchased a machine 10,000
Salaries payable increase 18,000
Other accrued liabilities decrease 8,000
(1) Prepare the operation activities section of the statement of cash flows using the indirect method.
(2) What were the major reasons that this company was able to report a net loss but positive cash flow from operations?
(3) Of the potential causes of differences between cash flow from operations and net income, which are the most important to investors?

7. Murphy is preparing for a meeting with her banker. Her business is finishing its fourth year of operation. In the first year, it had negative cash flows from operation. In the second and third years, cash flows from operations were positive. However, inventory costs rose significantly in year 4, and cash flows from operations will probably be down 25%. Murphy wants secure a line of credit from her banker as financing buffer. From experience, she knows the banker will scrutinize operation cash flows for years 1 thru 4 and will want a projected number for year 5. Murphy knows that a steady progression upward in operation cash flows for years 1 thru 4 will help her case. She decided to use her discretion as owner and considers several business actions that will turn her operation cash flow in year 4 from a decrease to an increase.
(1) Identify two business actions Murphy might take to improve cash flows from operations.
(2) Comment on the ethics and possible consequences of Murphy's decision to pursue these actions.

Reference no: EM13214960

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