Question

Micro Manufacturing reports net income of $850,000. Depreciation Expense is $60,000, Accounts Receivable increases $30,000 and Accounts Payable decreases $10,000. Calculate net cash flows from operating activities using the indirect method.

Answer 1

To calculate net cash flows from operating activities using the indirect method, start with net income, then add back non-cash expenses and adjust for changes in working capital. For Micro Manufacturing, the final calculation results in a net cash flow from operating activities of $870,000, after accounting for the adjustments of Depreciation Expense, Accounts Receivable, and Accounts Payable.

Step-by-step explanation:

When calculating net cash flows from operating activities using the indirect method, we start with the net income and make adjustments for non-cash expenses and changes in working capital. In this case, Micro Manufacturing reports a net income of $850,000. We add back Depreciation Expense of $60,000 because it is a non-cash charge. Next, we adjust for changes in operating working capital: an increase in Accounts Receivable by $30,000 reflects earnings that have not yet been collected in cash, so we subtract this from the net income. A decrease in Accounts Payable by $10,000 means that cash has been paid out, reducing cash flows, so we also subtract this amount.

The final calculations would be as follows:

After considering all adjustments, is that the net cash flow from operating activities is $870,000.