A company uses the indirect method to prepare its statement of cash flows. During the year, the company reported net income of $250,000. Depreciation expense was $40,000, and a gain on the sale of equipment was $15,000. Accounts receivable decreased by $20,000, and accounts payable increased by $10,000. What is the net cash provided by operating activities?
- A$265,000
- B$285,000
- C$325,000
- D$305,000
Show answer & explanationAnswer & explanation
Correct answer: D. $305,000
To calculate net cash from operating activities using the indirect method, start with net income. Add back non-cash expenses like depreciation ($40,000). Subtract non-cash gains like gain on sale of equipment ($15,000). Adjust for changes in current operating assets and liabilities: a decrease in accounts receivable is added ($20,000), and an increase in accounts payable is added ($10,000). So, $250,000 (NI) + $40,000 (Depreciation) - $15,000 (Gain) + $20,000 (AR decrease) + $10,000 (AP increase) = $305,000.
Why the other options are wrong
- A. This might result from incorrectly treating the decrease in accounts receivable or the increase in accounts payable.
- B. This could be an error in adjusting for the gain on sale of equipment or other working capital changes.
- C. This might arise from double-counting an adjustment or making an arithmetic error.
Indirect Method (Statement of Cash Flows)
A method for preparing the operating activities section of the statement of cash flows, starting with net income and adjusting for non-cash items and changes in working capital.
- Starts with net income and reconciles to cash from operations.
- Adds back non-cash expenses (e.g., depreciation, amortization).
- Subtracts non-cash gains and adds non-cash losses.
- Adjusts for changes in current operating assets and liabilities.
Memory trick: Operating Cash: Net Income, Adjust, Flow, then Dash!