Absolutely! Let’s break down what you see in these images and how to **prepare the cash flows from operating activities using the indirect method**. --- ### **1. Income Statement** This shows the company’s revenue and expenses for the year: - **Net Sales:** $620,000 - **Cost of Goods Sold:** $359,600 - **Gross Profit:** $260,400 (Net Sales - Cost of Goods Sold) - **Operating Expenses:** - Selling Expenses (Sales Commissions + Shipping) = $49,000 - General/Admin Expenses (Depreciation, Rent, Salaries, etc.) = $118,990 - **Total Operating Expenses:** $159,990 - **Net Income from Operations:** $100,580 - **Other Income/Expenses:** Includes gain on sale of equipment, interest expenses, etc. - **Net Income after Income Taxes:** $61,665 --- ### **2. Comparative Balance Sheet** Shows assets at two points in time — 20X3 and 20X2 — and the changes: - **Current Assets:** Cash, Investments, Receivables, Inventory, Prepaid Expenses - **Property, Plant, Equipment:** Land, Building, Equipment (net of Accumulated Depreciation) - **Total Assets for 20X3:** $656,600 - **Total Assets for 20X2:** $640,750 - The difference shows increases/decreases in these accounts. --- ### **3. Additional Info** - Some plant assets were sold (original cost $67,200, sold for $56,400, gain = $8,200). - Dividends were paid in 20X3. --- ### **4. Cash Flows from Operating Activities (Indirect Method)** This is the main task: #### **Steps in the Indirect Method:** 1. **Start with Net Income after Taxes:** - From the income statement: **$61,665** 2. **Add back non-cash expenses:** - **Depreciation Expense:** $49,700 (added back because it reduced net income but did not use cash) 3. **Adjust for changes in working capital:** - **Increase in accounts receivable** (subtract; more sales on credit, less cash collected) - **Increase in inventory** (subtract; more cash tied up in stock) - **Increase in prepaid expenses** (subtract; more cash paid in advance) - **Decrease in accounts payable** (subtract; paid off suppliers, less cash) - **Increase in income tax payable** (add; less cash paid out than expense recognized) 4. **Remove non-operating gains/losses:** - **Gain on sale of equipment** (subtract; gain included in net income, but the cash from sale is an investing activity, not operating) #### **How the Table is Structured:** | Additions/Deductions | Amount | |-----------------------------------------------|-------------| | Net income after taxes | $61,665 | | + Depreciation expense | $49,700 | | + / - Changes in working capital accounts | (calculated)| | - Gain on sale of equipment | ($8,200) | | **Total adjustments** | $49,700 | | **Net cash provided by operating activities** | $111,365 | --- ### **Key Takeaways:** - **Indirect method** starts with net income, adjusts for non-cash and non-operating items, and changes in working capital accounts. - Depreciation is added back because it’s a non-cash expense. - Gains on sales of assets are subtracted, as they are part of investing activities. - Changes in current assets and liabilities are added or subtracted depending on whether they used or provided cash. --- ### **If you want to fill in the missing numbers:** You would: - Compare the balance sheet accounts from 20X3 and 20X2 for: - Accounts Receivable - Inventory - Prepaid Expenses - Accounts Payable - Income Tax Payable And use these changes to adjust net income, as described above. --- **Let me know if you want to see the calculation for each adjustment!**