Question

Consider the following: Net income: $17,300 Depreciation expense: 12,000 Gain on sale of land: 7,500 Increase in Inventory: 2,050 Increases in wages payable: 6,150 Payments of dividends: 2,000 Calculate the net cash provided (or used) by operating activities using the INDIRECT method?

Answer 1

The net cash provided by operating activities using the INDIRECT method is $32,000.

Step-by-step explanation:

In the indirect method, we start with net income and adjust for non-cash items and changes in working capital to derive the net cash provided by operating activities.

Firstly, we add back non-cash expenses to net income. Depreciation expense is a non-cash item, so we add it back to net income: $17,300 + $12,000 = $29,300.

Secondly, we consider gains or losses on the sale of assets. In this case, there is a gain on the sale of land, so we add it to the previous total: $29,300 + $7,500 = $36,800.

Next, we account for changes in working capital. An increase in inventory is a use of cash, so we subtract it: $36,800 - $2,050 = $34,750.

Increases in wages payable represent an increase in liabilities, so we subtract it as well: $34,750 - $6,150 = $28,600.

Finally, payments of dividends represent an outflow of cash, so we subtract that too: $28,600 - $2,000 = $26,600.

Therefore, the net cash provided by operating activities using the INDIRECT method is $26,600. However, we need to consider the increase in inventory, which was subtracted, and adjust for it: $26,600 + $2,050 = $28,650.

In conclusion, the net cash provided by operating activities, using the INDIRECT method, is $28,650. This represents the cash generated or used by the company's core operating activities after accounting for various adjustments.