The income statement disclosed the following items for 2016

The income statement disclosed the following items for 2016:

Balances of the current assets and current liability accounts changed between December 31, 2015, and December 31, 2016, as follows:

Required:

Depreciation expense	$ 57,600
Gain on disposal of equipment	33,600
Net income	508,000

Solution

(a) Cash Flows from Operating Activities section of the statement of cash flows

Statement of Cash Flows

For the year ended December 31, 2016

Cash flows from operating activities:

Net income

508,000

Adjustments to reconcile net income to net cash flow from operating activities:

Depreciation

57,600

Gain on disposal of equipment

- 33,600

Changes in current operating assets and liabilities:

Increase in accounts receivable

- 8,960

Decrease in inventory

5,120

Decrease in prepaid insurance

1,920

Decrease in accounts payable

- 6,080

Increase in income taxes payable

1,410

17,410

Net cash flow from operating activities

525,410

(b) One of the main reason for difference in net cash flow from operating activities than net income is the noncash expenses such as Depreciation of Fixed assets and the amortization of intangible assets. These are no cash outlay under these two expenses. The depreciation and amortizations are the non cash items and there are no outflow of cash from the enterprises.

Another one reason is the non operating gains and losses considered for the determination of net income but the cash flows are disclosed under investing or financing activities.

Statement of Cash Flows
For the year ended December 31, 2016
Cash flows from operating activities:
Net income		508,000
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation	57,600
Gain on disposal of equipment	- 33,600
Changes in current operating assets and liabilities:
Increase in accounts receivable	- 8,960
Decrease in inventory	5,120
Decrease in prepaid insurance	1,920
Decrease in accounts payable	- 6,080
Increase in income taxes payable	1,410	17,410
Net cash flow from operating activities		525,410