Question

Calculate operating activities—indirect method (LO11-3)

Portions of the financial statements for Alliance Technologies are provided below.
ALLIANCE TECHNOLOGIES
Income Statement
For the year ended December 31, 2021
Net sales $ 325,000
Expenses:
Cost of goods sold $ 195,000
Operating expenses 62,000
Depreciation expense 16,200
Income tax expense 23,000
Total expenses 296,200
Net income $ 28,800
ALLIANCE TECHNOLOGIES
Selected Balance
Sheet Data December 31, 2021, compared to December 31, 2020
Decrease in accounts receivable $ 6,200
Increase in inventory 13,200
Decrease in prepaid rent 9,200
Increase in salaries payable 5,200
Decrease in accounts payable 8,200
Increase in income tax payable 20,800

Answer 1

Answer: $65,000

Step-by-step explanation:

The Operating Section of the Cash flow statement deals with transactions that have to do with the firm's provision of goods and services to customers as well as transactions related to the running of the business.

Anything that reduces the cash on hand is subtracted and anything that adds to cash is added to the Net Income.

That means that,

- Increase in current assets must be deducted because it represents money being owed to company or money spent on assets

- Increase in Current Liabilities must be added because it means that less money is flowing to creditors

- Add Depreciation because it is a non cash expense that was deducted from income

- Add loss on sale of plant assets as it was deducted from the net income even though it is a non cash expense.

The reverse holds true for all the above.

Calculating the Operating Activities is therefore,

= 28,800 (Net Income) + 16,200 (Depreciation) +6,200 (Decrease in accounts receivable) + 9,200 (decrease in prepaid rent) + 5,200 ( increase in salaries payable) + 20,800 (increase in net income tax payable) - 13,200 ( increase in inventory) - 8,200 (decrease in accounts payable)

= $65,000

Cash from Operating Activities is $65,000