Using The Following Data Prepare Stanley Inc.'s Cash Flows

using The Following Data Prepare Stanley Incs Cash Flows From Ope

Using the following data, prepare Stanley Inc.'s Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method. Net income is $525,000. Depreciation expense is $82,500. Gain on disposal of equipment is $14,600. Increase in accounts receivable is $10,150. Decrease in accounts payable is $3 (the rest of the data appears truncated or incomplete but will be addressed as necessary).

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Paper For Above instruction

The preparation of a statement of cash flows is a vital aspect of financial analysis, providing stakeholders with insights into a company's liquidity and operational efficiency. Using the indirect method, which begins with net income and adjusts for non-cash transactions and changes in working capital, is a common approach in preparing the cash flows from operating activities. This method reconcilies net income to net cash provided or used by operating activities, offering a detailed perspective on how operating net income translates into actual cash movements.

Introduction

Stanley Inc., like many corporations, must prepare a statement of cash flows to communicate its liquidity position to investors, creditors, and other stakeholders. The cash flows from operating activities (CFO) are particularly important because they reflect the company's ability to generate cash from its core business operations. The indirect method of preparing the CFO section involves starting with net income and adjusting for items such as depreciation, gains or losses on asset disposals, and changes in working capital components.

Data Summary

The data provided for Stanley Inc. includes a net income figure of $525,000, a depreciation expense of $82,500—adding back non-cash depreciation—and a gain on disposal of equipment of $14,600, which needs to be subtracted since it's a non-operational gain. Additionally, increases in accounts receivable of $10,150 and a decrease in accounts payable of $3 must be taken into account, as these changes affect cash flow through changes in working capital.

Net Income and Adjustments

Starting with net income of $525,000, the adjustments for the indirect method are as follows:

- Add back depreciation expense: $82,500 (non-cash expense)

- Subtract gain on disposal of equipment: $14,600 (non-operating gain)

- Subtract increase in accounts receivable: $10,150 (use of cash)

- Subtract decrease in accounts payable: $3 (since payable decreased, cash outflow)

The net adjustment for working capital changes is the sum of these adjustments, which in this case is:

$82,500 (depreciation) - $14,600 (gain) - $10,150 (accounts receivable increase) - $3 (accounts payable decrease) = $57,747

Calculation of Cash Flows from Operating Activities

Applying these adjustments:

Net cash provided by operating activities = net income + depreciation - gain on disposal - increase in accounts receivable - decrease in accounts payable

= $525,000 + $82,500 - $14,600 - $10,150 - $3 = $582,747

This figure reflects the cash generated from Stanley Inc.'s core operations, after accounting for non-cash expenses and changes in working capital.

Concluding Remarks

The indirect method provides a clear view of how net income is converted into cash flow from operating activities, emphasizing the importance of working capital management and non-cash expenses. Accurate preparation of this section is crucial for assessing company liquidity and operational effectiveness. Given the incomplete data, certain assumptions are made, but the overall methodology remains consistent.

References

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