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The preparation of the Cash Flows from Operating Activities—Indirect Method is shown below:
Cash flow from Operating activities - Indirect method
Net income $145
Adjustment made: Add : Depreciation expense $98 Add: Loss on sale of land $4 Add: Amortization expense $5 Less: Increase in cash balance -$8 ($138 - $130) Add: Decrease in accounts receivable $16 ($261 - $277)
Add: Decrease in inventory $15 ($465 - $480) Add: Increase in accounts payable $9 ($203 - $194) Less: Decrease in salaries payable -$9 ($107 - $116) Add: Increase in interest payable $7 ($57 - $50) Add: Increase in income tax payable $8 ($48 - $40)
Total of Adjustments $145
Net Cash flow from Operating activities $290
What is Depreciation?
Depreciation is an accounting technique for spreading out the expense of a tangible item over the course of its useful life. How much of an asset's value has been used is shown through depreciation. It enables businesses to purchase assets over a predetermined length of time and generate income from those assets. The immediate cost of ownership is greatly lowered because businesses do not have to fully account for them in the year the assets are purchased. A company's profits can be significantly impacted by not accounting for depreciation. Long-term assets can also be depreciated by businesses for tax and accounting reasons. Depreciation is comparable to amortization, which takes into account the increase in value of intangible assets over time.
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