Question

Software Distributors reports net income of $48,000. Included in that number is depreciation expense of $6,500 and a loss on the sale of land of $4,300. A comparison of this year's and last year's balance sheets reveals a decrease in accounts receivable of $18,000, a decrease in inventory of $11,500, and an increase in accounts payable of $38,000. Required: Prepare the operating activities section of the statement of cash flows using the indirect method. (List cash outflows and any decrease in cash as negative amounts.)

Answer 1

Answer:

Operating Activities Section

Net Income                                                             $48,000

Adjust for non -cash items :

Depreciation expense                                             $6,500

Loss on the sale of land                                          $4,300

Adjust for changes in working capital :

Decrease in accounts receivable                         $18,000

Decrease in inventory                                            $11,500

Increase in accounts payable                              $38,000

Net Cash Provided by Operating Activities      $126,000

Explanation:

The Indirect Method of preparing the cash flow from operating activities section reconciles the Net Income for the Year to Operating Cash flow amount.

This reconciliation adjusts non cash items previously included in net income and changes in working capital to arrive at Operating Cash flow amount as shown above.