A company is preparing its statement of cash flows using the indirect method. During the year, the company had net income of $200,000. Depreciation expense was $30,000, and a gain on the sale of equipment was $5,000. Accounts receivable decreased by $10,000, and accounts payable increased by $15,000. What is the net cash provided by operating activities?
- A$250,000
- B$260,000
- C$270,000
- D$220,000
Show answer & explanationAnswer & explanation
Correct answer: A. $250,000
To calculate net cash from operating activities using the indirect method: Start with Net Income ($200,000). Add back non-cash expenses like Depreciation ($30,000). Subtract non-operating gains like Gain on Sale of Equipment ($5,000). Add decreases in current assets like Accounts Receivable ($10,000). Add increases in current liabilities like Accounts Payable ($15,000). Calculation: $200,000 + $30,000 - $5,000 + $10,000 + $15,000 = $250,000.
Why the other options are wrong
- B. This calculation incorrectly subtracts the decrease in accounts receivable or makes another error.
- C. This calculation incorrectly adds the gain on sale and makes other errors.
- D. This calculation incorrectly adds the gain on sale of equipment instead of subtracting it.
Indirect Method (Statement of Cash Flows)
The indirect method for the operating activities section of the statement of cash flows starts with net income and adjusts it for non-cash items, non-operating gains/losses, and changes in current operating assets and liabilities.
- Starts with net income.
- Adds back non-cash expenses (e.g., depreciation, amortization).
- Subtracts non-operating gains; adds non-operating losses.
- Adjusts for changes in current operating assets and liabilities.
Memory trick: NI plus non-cash, less non-ops, then working cap dash.