Concept explainers
A company uses the indirect method to determine its
Net income | $15,200 |
10,000 | |
Cash payment on note payable | 8,000 |
Gain on sale of land | 3,000 |
Increase in inventory | 1,500 |
Increase in accounts payable | 2,850 |
- a. $23,550 used by operating activities
- b. $23,550 provided by operating activities
- c. $15,550 provided by operating activities
- d. $42,400 provided by operating activities
- e. $20,850 provided by operating activities
Determine the net cash provided by operating activities.
Answer to Problem 1MCQ
The correct answer is Option (b) $23,550 provided by operating activities.
Explanation of Solution
Statement of cash flows: Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.
Indirect method: Under indirect method, net income is reported first, and then non-cash expenses, losses from fixed assets, and changes in opening balances and ending balances of current assets are adjusted to reconcile the net income balance.
Prepare the statement of cash flows of a Company for the year under indirect method.
Company | ||
Statement of cash flows (Partial) | ||
For the year ended | ||
Particulars | Amount | Amount |
Cash flow from operating activities: | ||
Net Income | $15,200 | |
Adjustment to reconcile net income to net cash flow from operating activities: | ||
Income statement items not affecting cash: | ||
Add: Depreciation expense | $10,000 | |
Less: Gain on sale of plant assets | ($3,000) | |
Changes in current assets and liabilities | ||
Add: Increase in accounts payable | $2,850 | |
Less: Increase in inventory | ($1,500) | $8,350 |
Net cash flows from operating activities | $23,550 |
Table (1)
From the above explanation, Option (a), (c), (d) and (e) are incorrect answers. So, the correct answer is Option (b).
Hence, the correct answer is Option (b) $23,550 provided by operating activities.
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Chapter 16 Solutions
Principles of Financial Accounting.
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