Question

The net income reported on the income statement for the current year was $257,802. Depreciation recorded on fixed assets and amortization of patents for the year were $41,710, and $8,687, respectively. Balances of current asset and current liability accounts at the end and at the beginning of the year are as follows:

End Beginning
Cash $37,508 $56,952
Accounts receivable 107,171 124,121
Inventories 86,751 101,544
Prepaid expenses 6,923 2,272
Accounts payable (merchandise creditors) 77,711 49,320

What is the amount of cash flows from operating activities reported on the statement of cash flows prepared by the indirect method? Select the correct answer.
a. $279,385
b. $363,682
c. $273,000
d. $339,942

Answer 1

The amount of cash flows from operating activities reported on the statement of cash flows prepared by the indirect method is $279,385. The correct answer is A.

Step-by-step explanation:

The amount of cash flows from operating activities reported on the statement of cash flows prepared by the indirect method can be calculated using the following formula:

Cash flows from operating activities = Net income + Depreciation + Amortization - Increase in accounts receivable - Decrease in inventories - Decrease in prepaid expenses + Increase in accounts payable

Substituting the given values, we get:

Cash flows from operating activities = $257,802 + $41,710 + $8,687 - ($124,121 - $107,171) - ($101,544 - $86,751) - ($2,272 - $6,923) + ($77,711 - $49,320)

Simplifying the equation, we find that the amount of cash flows from operating activities is $279,385.

By adding back non-cash expenses to the net income and adjusting for changes in working capital on the indirect method statement of cash flows, the cash flows from operating activities is calculated to be $363,682, which is option b.

To calculate the amount of cash flows from operating activities reported on the statement of cash flows using the indirect method, we start with the net income and adjust for non-cash expenses and changes in working capital.

• Start with net income: $257,802
• Add back non-cash expenses:
• Depreciation: $41,710
• Amortization of patents: $8,687
• Adjust for changes in working capital:
• Decrease in accounts receivable: $124,121 - $107,171 = $16,950
• Decrease in inventories: $101,544 - $86,751 = $14,793
• Decrease in prepaid expenses: $2,272 - $6,923 = -$4,651 (negative because an increase in a current asset)
• Increase in accounts payable: $77,711 - $49,320 = $28,391
• Decrease in cash: $56,952 - $37,508 = -$19,444 (not included in operating activities calculation)
• Total adjustments: $41,710 + $8,687 + $16,950 + $14,793 - $4,651 + $28,391 = $105,880
• Cash flows from operating activities: $257,802 + $105,880 = $363,682

The correct answer is option b. $363,682.