Question

Fortune corporation's comparative balance sheet listed current assets and liabilities as follows:

dec. 31, year 2 dec. 31, year 1
accounts receivable $7,500 $5,200
inventory 11,500 16,000
accounts payable 4,300 5,200
dividends payable 4,000 3,000
adjust year 2 net income of $65,000 for changes in current operating assets and liabilities to arrive at net cash flows from operating activities using the indirect method.

Answer 1

To adjust Fortune Corporation's year 2 net income for changes in current operating assets and liabilities, increases in assets are subtracted and decreases are added, whereas for liabilities, increases are added and decreases are subtracted, resulting in a net cash flow from operating activities of $67,300.

Step-by-step explanation:

The question involves adjusting the year 2 net income for changes in current operating assets and liabilities to arrive at net cash flows from operating activities using the indirect method. To do this, we start with the net income and adjust for changes in accounts receivable, inventory, accounts payable, and dividends payable. Changes in assets are accounted for inversely, while changes in liabilities are taken at face value in relation to the net cash flow.

Net income for year 2: $65,000

Increase in accounts receivable: Year 2 ($7,500) - Year 1 ($5,200) = $2,300 increase, so subtract this from net income.

Decrease in inventory: Year 1 ($16,000) - Year 2 ($11,500) = $4,500 decrease, so add this to net income.

Decrease in accounts payable: Year 1 ($5,200) - Year 2 ($4,300) = $900 decrease, so subtract this from net income.

Increase in dividends payable: Year 2 ($4,000) - Year 1 ($3,000) = $1,000 increase, so add this to net income.

Adjusting net income for changes in current operating assets and liabilities:

$65,000 - $2,300 + $4,500 - $900 + $1,000 = $67,300 net cash flow from operating activities.