Prepare A Statement Of Cash Flows For Business Solutions Us

Prepare a statement of cash flows for Business Solutions using the indirect method for the three months ended March 31, 2016

Santana Rey, owner of Business Solutions, has decided to prepare a statement of cash flows for her business for the three months ending March 31, 2016. This process involves analyzing the company's financial statements, including the income statement and comparative balance sheets, to determine the cash flows from operating, investing, and financing activities. The indirect method will be utilized, which begins with net income and adjusts for non-cash transactions and changes in working capital.

Introduction

The statement of cash flows is an essential financial report that provides insight into a company's cash inflows and outflows during a specific period. It helps stakeholders understand how a business manages its cash position, including sources of cash and how it is spent. The indirect method is commonly used because it reconciles net income to net cash provided by operating activities, offering a clear view of cash performance in relation to net income.

Analysis of Financial Data

From the income statement, Business Solutions reported a net income of $19,713 for the three months ending March 31, 2016. The balance sheets reveal changes in assets, liabilities, and equity that impact cash flows. Notably, the cash balance increased from $58,952 on December 31, 2015, to $83,397 on March 31, 2016, indicating a net increase in cash of $24,445.

Preparation of the Statement of Cash Flows

Operating Activities

The starting point for operating activities is net income, which is adjusted for non-cash expenses such as depreciation and changes in working capital components, including accounts receivable, inventory, prepaid expenses, accounts payable, wages payable, and unearned revenue.

Depreciation expenses for office equipment ($400) and computer equipment ($1,180) are added back to net income because they are non-cash charges. Changes in working capital are derived from comparing December 31, 2015, and March 31, 2016:

  • Accounts receivable: Increased from approximately $24,368, indicating a cash use of about $24,368, reducing cash flows.
  • Inventory and computer supplies: As detailed in the balance sheets, if available, adjustments are made accordingly.
  • Prepaid insurance and rent: Changes in these prepaid expenses affect cash flows; increases indicate cash outflows.
  • Accounts payable: Decreased from $1,180 to zero, indicating payments made, reducing cash flows.
  • Wages payable and unearned revenue: Adjustments reflect cash paid or received that differ from expenses or revenues recognized.

Investing Activities

The net cash flows from investing activities are primarily determined by changes in long-term assets. The purchase or sale of office and computer equipment impacts cash flows. Details of acquisitions or disposals are essential but are not explicitly provided here; thus, the net change in these accounts is accounted for based on accumulated depreciation and asset book values.

Financing Activities

Financing activities include owner contributions and withdrawals, as well as dividend payments. Santana Rey contributed $31,000 to the business during the period, increasing cash flows, while $4,600 was paid out as dividends, reducing cash. Changes in long-term liabilities or loans, if any, would be included here, but are not specified in this scenario.

Calculations and Final Statement

Based on the above analysis, the statement of cash flows will present the net cash provided by operating activities, adjusted for non-cash expenses and working capital changes; net cash used or provided by investing activities; and net cash used or provided by financing activities. Summing these provides the net increase in cash, aligning with the change seen on the balance sheets.

Conclusion

The preparation of the cash flow statement using the indirect method offers a comprehensive view of Business Solutions' cash management during the quarter. It highlights how operating profitability translates into cash, the impact of investing in assets, and the financing activities that support growth or dividend distributions. This report is vital for management and stakeholders to assess liquidity and financial health.

References

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