Question

cain company reports net cash provided by operating activities of $38,500. it also reports the following information under "adjustments to reconcile net income to net cash provided by operating activities" on its statement of cash flows (using the indirect method). gain on sale of equipment $ 11,400 decrease in inventory $ 7,400 increase in accounts receivable 4,700 increase in prepaid expenses 5,400 depreciation expense 8,400 decrease in wages payable 4,400

Answer 1

The student's question involves the indirect method used for preparing the statement of cash flows, where various non-cash transactions and changes in working capital are used to reconcile net income to net cash provided by operating activities.

Step-by-step explanation:

The question relates to the statement of cash flows prepared using the indirect method, which involves adjusting net income to arrive at net cash provided by operating activities. The accounting profit is calculated by deducting explicit costs (labor, capital, materials) from total revenues. In the scenario provided by the student, the Cain Company has a gain on sale of equipment, changes in working capital accounts such as inventory, accounts receivable, prepaid expenses, and wages payable, as well as depreciation expense. These are all adjustments that reconcile net income to net cash provided by operating activities.

Answer 2

the net cash provided by operating activities, calculated using the indirect method, is $37,200. This represents the cash generated or used by the company's core operating activities after accounting for non-cash expenses and changes in working capital accounts.

To calculate the net cash provided by operating activities using the indirect method, we need to start with the net income and make adjustments for various non-cash items and changes in working capital accounts. Here's a step-by-step breakdown of the calculations:

1. Start with Net Income:

- Net Income = $38,500

2. Add Back Depreciation Expense (a non-cash expense):

- Depreciation Expense = $8,400

- Net Income + Depreciation Expense = $38,500 + $8,400 = $46,900

3. Adjust for Gain on Sale of Equipment (a non-operating item):

- Gain on Sale of Equipment = $11,400

- Net Income + Depreciation Expense - Gain on Sale of Equipment = $46,900 - $11,400 = $35,500

4. Adjust for Decrease in Inventory (an increase in cash):

- Decrease in Inventory = $7,400

- Net Income + Depreciation Expense - Gain on Sale of Equipment + Decrease in Inventory = $35,500 + $7,400 = $42,900

5. Adjust for Increase in Accounts Receivable (a use of cash):

- Increase in Accounts Receivable = $4,700

- Net Income + Depreciation Expense - Gain on Sale of Equipment + Decrease in Inventory - Increase in Accounts Receivable = $42,900 - $4,700 = $38,200

6. Adjust for Increase in Prepaid Expenses (a use of cash):

- Increase in Prepaid Expenses = $5,400

- Net Income + Depreciation Expense - Gain on Sale of Equipment + Decrease in Inventory - Increase in Accounts Receivable - Increase in Prepaid Expenses = $38,200 - $5,400 = $32,800

7. Adjust for Decrease in Wages Payable (an increase in cash):

- Decrease in Wages Payable = $4,400

- Net Income + Depreciation Expense - Gain on Sale of Equipment + Decrease in Inventory - Increase in Accounts Receivable - Increase in Prepaid Expenses + Decrease in Wages Payable = $32,800 + $4,400 = $37,200

So, the net cash provided by operating activities, calculated using the indirect method, is $37,200. This represents the cash generated or used by the company's core operating activities after accounting for non-cash expenses and changes in working capital accounts.