An analysis of the annual financial statements of Conner Corporation reveals the following:
a. The company had a $5 million extraordinary loss from insurance proceeds received due to a tornado that destroyed a factory building.
b. Depreciation for the year amounted $8 million.
c. During the year, $2 million in cash was transferred from the company's checking account into a money market fund.
d. Accounts receivable from customers increased by $4 million over the year.
e. Cash received from customers during the year amounted to $167 million.
f. Prepaid expenses decreased by $1 million over the year.
g. Dividends declared during the year amounted to $7 million; dividends paid during the year amounted to $6 million.
h. Accounts payable (to suppliers of merchandise) increased by $2.5 million during the year.
i. The liability for accrued income taxes payable amounted to $5 million at the beginning of the year and $3 million at year-end.
In the computation of net cash flows from operating activities by the indirect method, explain whether each of the above items should be added to net income, deducted from net income, or omitted from the computation. Briefly explain your reasons for each answer.
What Is Operating Cash Flow:
A company's Operating Cash Flow is presented at the top portion of the cash flow statement. The Operating Cash Flow reflects the net cash used/generated by the company's income and changes to its working capital structure.
Answer and Explanation:
a. Deducted since gains and losses are non-cash transactions.
b. Deducted since depreciation is a non-cash transaction.
c. Omitted because the money market fund is a cash equivalent.
d. Deducted because current assets decrease as a result.
e. Omitted because we are using the indirect method and not the direct method.
f. Added because current assets increase as a result.
g. Deducted because current liabilities decrease as a result.
h. Added because current liabilities increase as a result.
i. Deducted because current liabilities decrease as a result.
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from Finance 101: Principles of FinanceChapter 10 / Lesson 4