Can someone help me with these two Becker cash flow questions? I am trying to understand why they added goodwill impairment in one problem but deducted it in another.
PROBLEM 1:
Twin House Inc. reported net income of $753,000 for the current year-ended December 31. Twin House's financial statements reflected the following information:
Depreciation expense $ 150,000
Gain on sale of trading securities 6,000
Goodwill impairment 75,000
Decrease in accounts receivable 48,000
Increase in inventory 33,000
Decrease in trading securities 50,000
Increase in available-for-sale securities 62,000
Increase in accounts payable 70,000
Decrease in taxes payable 15,000
Dividend paid 200,000
Dividend received 27,000
What should Twin House report as net cash provided by operating activities on the statement of cash flows, assuming that Twin House classifies the proceeds from the sale of the trading securities as an operating cash inflow?
Answer: $1,092,000
Explanation
Net income $ 753,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense $ 150,000
Goodwill impairment 75,000
Gain on sale of trading securities (6,000)
Changes in current assets and liabilities:
Decrease in accounts receivable 48,000
Increase in inventory (33,000)
Decrease in trading securities 50,000
Increase in accounts payable 70,000
Decrease in taxes payable (15,000)
Total Adjustments 339,000
Net cash provided by operating activities $ 1,092,000
PROBLEM 2:
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?
Explanation
$205,000 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.
Cash flows from operating activities $ 400,000
Depreciation on equipment (190,000)
Impairment of goodwill (5,000)
Net Income $ 205,000
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