Reference no: EM131840513

Problem - A company completed its income statement and balance sheet for the year and provided the following information:

Income Statement

Service Revenue                    $55,000

Expenses:

Salaries                                  42,500

Rent                                       7,200

Depreciation                           6,800

Amortization of copyrights       1,000

Total Expenses                       57,500

Net loss                                 $(2,500)

Partial Balance Sheet

                                     Current Year         Prior Year

Accounts receivable            $7,000              $16,000

Salaries Payable                14,000                7,200

Prepaid rent                       2,200                 8,400

In addition, the company bought a small piece of equipment costing $6,500.

Required:

1. Prepare the operating activities section of the statement of cash flows using the indirect method.

2. Explain why the company was able to report positive operating cash flow despite having a net loss for the year.