Question

Burch Company reported the following items in its statement of financial position and statement of earnings information: decrease in cash account, $20,000; increase in accounts receivable, $13,000; increase in inventory, $16,000; decrease in accounts payable, $7,000; decrease in income taxes payable, $6,000; net income, $49,000; depreciation expense, $10,000. Required: Compute the net cash flows from operating activities using the indirect method.

Answer 1

The net cash flows from operating activities using the indirect method is $55,000.

Step-by-step explanation:

The net cash flows from operating activities can be computed using the indirect method. In the indirect method, we start with net income and adjust for non-cash expenses and changes in working capital accounts.

To compute the net cash flows from operating activities, we will start with net income of $49,000 and make the following adjustments:

• Add back depreciation expense of $10,000 since it is a non-cash expense.
• Decrease in cash account of $20,000 is subtracted since it represents a decrease in cash.
• Increase in accounts receivable of $13,000 is subtracted since it represents a decrease in cash.
• Increase in inventory of $16,000 is subtracted since it represents a decrease in cash.
• Decrease in accounts payable of $7,000 is added since it represents an increase in cash.
• Decrease in income taxes payable of $6,000 is added since it represents an increase in cash.

Therefore, the net cash flows from operating activities using the indirect method is $55,000 ($49,000 + $10,000 - $20,000 - $13,000 - $16,000 + $7,000 + $6,000).