Question

Changes in various accounts and gains and losses on the sale of assets during the year for Argon Company are given below: Item Amount Accounts receivable $ 90,000 decrease Inventory $ 120,000 increase Prepaid expenses $ 3,000 decrease Accounts payable $ 65,000 decrease Accrued liabilities $ 8,000 increase Income taxes payable $ 12,000 increase Sale of equipment $ 7,000 gain Sale of long-term investments $ 10,000 loss Required: For each item, indicate whether the dollar amount should be added to or deducted from net income under the indirect method when computing the net cash provided by operating activities for the year.

Answer 1

Cash flow from Operating Activities

Working Capital Items

Decrease in Accounts receivable $ 90,000

Increase in Inventory ($ 120,000)

Decrease in Prepaid expenses $ 3,000

Decrease in Accounts payable ($ 65,000)

Increase in Accrued liabilities $ 8,000

Increase in Income taxes payable $ 12,000

Non - Cash Items

Gain on Sale of equipment ($ 7,000)

Loss on Sale of long-term investments $ 10,000

Net Cash flow from operating activities ($69,000)

Step-by-step explanation:

Cash flow from Operating Activities using the indirect method, reconciles the Net Income to the Net Cash flow after adjustments of non-cash items, items shown separately and working capital adjustments.

Cash flow from Operating Activities

Working Capital Items

Decrease in Accounts receivable $ 90,000

Increase in Inventory ($ 120,000)

Decrease in Prepaid expenses $ 3,000

Decrease in Accounts payable ($ 65,000)

Increase in Accrued liabilities $ 8,000

Increase in Income taxes payable $ 12,000

Non - Cash Items

Gain on Sale of equipment ($ 7,000)

Loss on Sale of long-term investments $ 10,000

Net Cash flow from operating activities ($69,000)

Answer 2

Accounts receivable $ 90,000 decrease - Added to net income

Inventory $ 120,000 increase - Deducted from net income

Prepaid expenses $ 3,000 decrease - Added to net income

Accounts payable $ 65,000 decrease - Deducted from net income

Accrued liabilities $ 8,000 increase - Added to net income

Income taxes payable $ 12,000 increase - Added to net income

Sale of equipment $ 7,000 gain - Deducted from net income

Sale of long-term investments $ 10,000 loss - Added to net income

Step-by-step explanation:

The cash flow statement categories the company's transactions in a financial period into 3 groups; these are operating, investing and financing.

The net profit/loss, depreciation (and other non-cash items), changes in current assets (other than cash) and liabilities are considered as operating activities including income taxes.

The sale of assets, interest received, purchase of investments are examples of investing activities while the issuance of stocks, debt principal deduction (loan settlement), issuance of debt securities etc are examples of financing activities.

Increase in assets other than cash is an outflow of cash,while an increase in liability is an inflow of cash.