Chapter 16, Problem 1MCQ

A company uses the indirect method to determine its cash flows from operating activities. Use the following information to determine its net cash provided or used by operating activities.

Net income	$15,200
Depreciation expense	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

1. a. $23,550 used by operating activities
2. b. $23,550 provided by operating activities
3. c. $15,550 provided by operating activities
4. d. $42,400 provided by operating activities
5. e. $20,850 provided by operating activities

To determine

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).

Conclusion

Hence, the correct answer is Option (b) $23,550 provided by operating activities.