Chapter 13 Statement of Cash Flows 587Cash flows from operating activities:
Net income $108,000
Add depreciation 7,000 $115,000In a recent year, Delta Air Lineshad a net loss of $773 million, but a positive cash
flow from operating activities of $453 million. This difference was mostly due to $1,230
million of depreciation and amortization. Except for start-up enterprises, negative cash
flows from operating activities would normally indicate financial distress.Current Assets and Current Liabilities
As shown in Exhibit 4, decreases in noncash current assets and increases in current
liabilities are added to net income. In contrast, increases in noncash current assets and
decreases in current liabilities are deducted from net income. The current asset and
current liability accounts for both comparative years and their change from 2006 to
2007 for Rundell Inc. are as follows:December 31 Increase
Accounts 2007 2006 Decrease*
Accounts receivable (net) $ 74,000 $ 65,000 $9,000
Inventories 172,000 180,000 8,000*
Accounts payable (merchandise creditors) 43,500 46,700 3,200*
Accrued expenses payable (operating expenses) 26,500 24,300 2,200
Income taxes payable 7,900 8,400 500*The $9,000 increase in accounts receivableindicates that the sales on account during
the year are $9,000 more than collections from customers on account. The amount re-
ported as sales on the income statement therefore includes $9,000 that did not result in
a cash inflow during the year. Thus, $9,000 is deducted from net income.
The $8,000 decrease in inventoriesindicates that the merchandise sold exceeds the
cost of the merchandise purchased by $8,000. The amount deducted as cost of mer-
chandise sold on the income statement therefore includes $8,000 that did not require a
cash outflow during the year. Therefore, $8,000 is added to net income.
The $3,200 decrease in accounts payableindicates that the amount of cash payments
for merchandise exceeds the merchandise purchased on account by $3,200. The amount
reported on the income statement for cost of merchandise sold therefore excludes
$3,200 that required a cash outflow during the year. Thus, $3,200 is deducted from net
income.
The $2,200 increase in accrued expenses payableindicates that the amount incurred
during the year for operating expenses exceeds the cash payments by $2,200. The
amount reported on the income statement for operating expenses therefore includes
$2,200 that did not require a cash outflow during the year. Hence, $2,200 is added to
net income.
The $500 decrease in income taxes payableindicates that the amount paid for taxes
exceeds the amount incurred during the year by $500. The amount reported on the in-
come statement for income tax therefore is less than the amount paid by $500. In this
case, $500 is deducted from net income.Gain on Sale of Land
The ledger or income statement of Rundell Inc. indicates that the sale of land resulted
in a gain of $12,000. As we discussed previously, the sale proceeds, which include the
gain and the carrying value of the land, are included in cash flows from investingQ.Net income was
$45,000 for the year. The
accumulated depreciation
balance increased by
$15,000 over the year.
There were no sales of
fixed assets or changes in
noncash current assets or
liabilities. What is the
cash flow from operations?
A.$60,000 ($45,000
$15,000)
Q.Net income was
$36,000 for the year.
Accounts receivable in-
creased $3,000, and ac-
counts payable increased
$5,000. What is the cash
flow from operations?
A.$38,000 ($36,000
$3,000$5,000)