QuestionJune 6, 2025

In preparing a company's statement of cash flows using the indirect method, the following information is available: Net income Accounts payable decreased by Accounts receivable increased by Inventories increased by Cash dividends paid Depreciation expense Net cash provided by operating activities was: 120,000 71,000 70,000 24,000 110,000

In preparing a company's statement of cash flows using the indirect method, the following information is available: Net income Accounts payable decreased by Accounts receivable increased by Inventories increased by Cash dividends paid Depreciation expense Net cash provided by operating activities was: 120,000 71,000 70,000 24,000 110,000
In preparing a company's statement of cash flows using the indirect method, the following information is available: Net income Accounts payable decreased by Accounts receivable increased by Inventories increased by Cash dividends paid Depreciation expense Net cash provided by operating activities was: 120,000 71,000 70,000 24,000 110,000

Solution
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Answer

\65,000 Explanation 1. Identify the components affecting cash flows The indirect method starts with net income and adjusts for changes in working capital and non-cash expenses. Here, we have net income, changes in accounts payable, accounts receivable, inventories, and depreciation expense. 2. Start with Net Income Begin with the net income of \120,000 as the base for calculating cash flows from operating activities. 3. Adjust for Depreciation Expense Add back the non-cash depreciation expense of \110,000 to net income because it reduces net income but does not affect cash flow. \[ \text{Adjusted Net Income} = 120,000 + 110,000 \] 4. Adjust for Changes in Working Capital Subtract increases in current assets (accounts receivable and inventories) and add decreases in current liabilities (accounts payable): - Accounts Receivable increased by \70,000, which is subtracted. - Inventories increased by \24,000, which is subtracted. - Accounts Payable decreased by \71,000, which is subtracted. \[ \text{Net Cash Flow} = 230,000 - 70,000 - 24,000 - 71,000 \] 5. Calculate Net Cash Provided by Operating Activities Sum up all adjustments to find the net cash provided by operating activities. \[ \text{Net Cash Provided by Operating Activities} = 65,000 \]

Explanation

1. Identify the components affecting cash flows<br /> The indirect method starts with net income and adjusts for changes in working capital and non-cash expenses. Here, we have net income, changes in accounts payable, accounts receivable, inventories, and depreciation expense.<br /><br />2. Start with Net Income<br /> Begin with the net income of \$120,000 as the base for calculating cash flows from operating activities.<br /><br />3. Adjust for Depreciation Expense<br /> Add back the non-cash depreciation expense of \$110,000 to net income because it reduces net income but does not affect cash flow.<br />\[<br />\text{Adjusted Net Income} = 120,000 + 110,000<br />\]<br /><br />4. Adjust for Changes in Working Capital<br /> Subtract increases in current assets (accounts receivable and inventories) and add decreases in current liabilities (accounts payable):<br />- Accounts Receivable increased by \$70,000, which is subtracted.<br />- Inventories increased by \$24,000, which is subtracted.<br />- Accounts Payable decreased by \$71,000, which is subtracted.<br />\[<br />\text{Net Cash Flow} = 230,000 - 70,000 - 24,000 - 71,000<br />\]<br /><br />5. Calculate Net Cash Provided by Operating Activities<br /> Sum up all adjustments to find the net cash provided by operating activities.<br />\[<br />\text{Net Cash Provided by Operating Activities} = 65,000<br />\]
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