CPA Exam - FAR (Financial Accounting and Reporting)Select TransactionsMedium
A client is preparing its statement of cash flows using the indirect method. During the year, the company reported net income of $500,000. Depreciation expense was $80,000, and a gain on the sale of equipment was $20,000. Accounts receivable increased by $30,000, and accounts payable decreased by $15,000. What is the net cash flow from operating activities?
- A$605,000
- B$555,000
- C$515,000
- D$575,000
Show answer & explanationAnswer & explanation
Correct answer: C. $515,000
Net income = $500,000. Add back depreciation (non-cash expense) = $80,000. Subtract gain on sale of equipment (non-operating income) = $20,000. Subtract increase in accounts receivable (cash used) = $30,000. Subtract decrease in accounts payable (cash used) = $15,000. Total = $500,000 + $80,000 - $20,000 - $30,000 - $15,000 = $515,000.
Why the other options are wrong
- A. Incorrectly adds both the increase in accounts receivable and the decrease in accounts payable.
- B. Incorrectly adds the decrease in accounts payable instead of subtracting it.
- D. Incorrectly adds the increase in accounts receivable instead of subtracting it.
Indirect Method - Operating Activities
A method of preparing the statement of cash flows that begins with net income and adjusts it for non-cash items and changes in working capital accounts to arrive at net cash flow from operating activities.
- Starts with net income.
- Adds back non-cash expenses (e.g., depreciation, amortization).
- Subtracts non-cash gains and adds non-cash losses (e.g., gain/loss on sale of assets).
- Adjusts for changes in current assets and liabilities (working capital accounts).
Memory trick: Net income's journey to cash, adjust for non-cash and working capital changes fast.