Question

The net income reported on the income statement for the current year was $295,000. Depreciation recorded on fixed assets and amortization of patents for the year were $40,000 and $5,000, respectively. Balances of current asset and current liability accounts at the end and at the beginning of the year are as follows: End Beginning Cash $ 50,000 $ 60,000 Accounts receivable 112,000 108,000 Inventories 105,000 93,000 Prepaid expenses 4,500 6,500 Accounts payable (merchandise creditors) 75,000 89,000 What is the net cash flow from operating activities reported on the statement of cash flows prepared by the indirect method? a. $368,000 b. $312,000 c. $208,000 d. $302,000

Answer 1

The correct answer is d) $302.000

Step-by-step explanation:

To get net cash flow using the indirect method we must make adjustments to the net income.

With the balance data, we get the decrease or increase of the different accounts.

End Beginning of each account

Cash $ 50,000 $ 60,000= Decrease in cash -10000

Accounts receivable 112,000 108,000= Increase in accounts receivable 4000

Inventories 105,000 93,000 = Increased inventory 12000

Prepaid expenses 4,500 6,500= Decreased in Prepaid expenses -2000

Accounts payable (merchandise creditors) 75,000 89,000= Decrease in accounts payable decreased -14000

It depends on the account if it is added or subtracted to net income. Below you will find the added account with a plus (+) and the subtracted ones with a minus (-)

Net income 295.000

Adjustment to reconcile the net income to cash

+ Depreciation expense 40.000

+ amortization of patents 5.000

- Decrease in cash (10.000)

- Increase in accounts receivable (4.000)

- inventory increased (12.000)

+ decreased Prepaid expenses 2.000

- accounts payable decreased (14.000)

Net cash 302.000