Question

An analysis of the balance sheet and income statement of Sanchez Company revealed the following: net income, $12,750; depreciation expense, $32,600: decrease in accounts receivable, 21,500: increase in inventory, $18,300: increase in accounts payable, $19,800: and a decrease in interest payable of $1200.

Compute the net cash flows from operating activities using the indirect method.

Answer 1

To calculate the net cash flows from operating activities for Sanchez Company using the indirect method, the net income is adjusted by adding back non-cash expenses and changes in working capital, resulting in a total of $67,150.

Step-by-step explanation:

To compute the net cash flows from operating activities using the indirect method, we start with the net income and adjust for changes in working capital and non-cash expenses:

• Start with net income: $12,750
• Add back depreciation expense: $32,600
• Add the decrease in accounts receivable, as this represents a cash inflow: $21,500
• Subtract the increase in inventory, as this is a cash outflow: -$18,300
• Add the increase in accounts payable, representing more cash available: $19,800
• Subtract the decrease in interest payable, as this is a cash outflow: -$1,200

After all adjustments, the net cash flow from operating activities is calculated as follows:

$12,750 (net income) + $32,600 (depreciation expense) + $21,500 (decrease in accounts receivable) - $18,300 (increase in inventory) + $19,800 (increase in accounts payable) - $1,200 (decrease in interest payable) = $67,150.

This value represents the total operating cash flow generated by Sanchez Company.