Question

Crane Company completed its first year of operations on December 31, 2022. Its initial income statement showed that Crane had sales revenue of $190,000 and operating expenses of $70,000. Accounts receivable and accounts payable at year-end were $50,000 and $15,000, respectively. Assume that accounts payable related to operating expenses. Ignore income taxes. Compute net cash provided by operating activities using the direct method.

Answer 1

The net cash provided by operating activities using the direct method is $85,000.

Step-by-step explanation:

The net cash provided by operating activities can be computed using the direct method by adjusting the income statement figures for non-cash expenses and changes in operating assets and liabilities. In this case, we need to start with the sales revenue and deduct the operating expenses to get the operating income. The accounts receivable and accounts payable need to be adjusted for the changes during the year to determine the cash collected from customers and cash paid to suppliers, respectively.

Using the figures given in the question:

• Sales revenue = $190,000
• Operating expenses = $70,000
• Accounts receivable at year-end = $50,000
• Accounts payable at year-end = $15,000

To compute the net cash provided by operating activities:

Operating income = Sales revenue - Operating expenses = $190,000 - $70,000 = $120,000

Cash collected from customers = Sales revenue - Increase in accounts receivable = $190,000 - ($50,000 - $0) = $140,000

Cash paid to suppliers = Operating expenses + Decrease in accounts payable = $70,000 + ($0 - $15,000) = $55,000

Therefore, the net cash provided by operating activities using the direct method is $140,000 - $55,000 = $85,000.