Statement of Cash flows question HELP

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  • #187412
    Anonymous
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    Reed Co.’s statement of cash flows reported cash provided from operating activities of $400,000. Depreciation of equipment was $190,000, impairment of goodwill was $5,000, and dividends paid on common stock were $100,000. In Reed’s statement of cash flows, what amount was reported as net income?

    a. $205,000

    b. $105,000

    c. $305,000

    d. $595,000

    Explanation

    Choice “a” is correct. Start with cash flows from operating activities and subtract depreciation and impairment expenses. Dividends paid are not included because dividends reduce retained earnings, not net income, and are included in cash flows from financing activities.

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  • #583880
    Anonymous
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    Remember that the question is asking for Net Income so you need to work this backwards. Start with operating activities of $400 less depreciation of $190 less impairment of goodwill of $5. This gives you the $205. Impairment works the same way as depreciation expense/accumulated depreciation.

    Hope this helps.

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