Question

Brandon Inc. reported the following items in its statement of financial position and statement of earnings: net income, $81,500; gain on disposal of equipment, $16,600; increase in accounts receivable, $17,400; decrease in accounts payable, $27,900, and increase in common shares, $50,000. Required: Compute the net cash flows from operating activities using the indirect method.

Answer 1

To calculate the net cash flows from operating activities using the indirect method, we adjust the net income by subtracting non-cash gains and changes in working capital. For Brandon Inc., the calculation results in net cash flows from operating activities of $19,600.

Step-by-step explanation:

The question at hand deals with calculating the net cash flows from operating activities for Brandon Inc. using the indirect method. Begin with the net income reported, which is $81,500. Adjustments are made for non-cash transactions and changes in working capital.

The gain on disposal of equipment is a non-cash item that increased income but did not affect cash flow, so this amount ($16,600) should be subtracted from net income. Changes in working capital items, such as an increase in accounts receivable ($17,400) and a decrease in accounts payable ($27,900), signify cash outflows and inflows respectively.

Thus, the increase in accounts receivable will be subtracted from net income, while the decrease in accounts payable will also be subtracted since it indicates cash was used to pay off liabilities.

The net cash flows from operating activities for Brandon Inc. would be $81,500 (net income) - $16,600 (gain on disposal) - $17,400 (increase in accounts receivable) - $27,900 (decrease in accounts payable) = $19,600.