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Software Distributors reports net income of $65,000. Included in that number is depreciation expense of $15,000 and a loss on the sale of land of $6,000. A comparison of this year's and last year's balance sheets reveals a decrease in accounts receivable of $28,000, a decrease in inventory of $37,000, and an increase in accounts payable of $45,000.


Required:

Prepare the operating activities section of the statement of cash flows using the indirect method.

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Answer:

Software Distributors

Statement of cash flows (extract)

Cash flows from operations  

Net income                                   $65,000

Depreciation expense                      15,000

Loss on sale of land                       6,000

Decrease in accounts receivable           28,000

Decrease in inventory                     37,000

Increase in account payable     45,000

Net cash flows from operating activities $196,000

Explanation:

In preparing the cash flows from operations, the net income has to come first. Being that depreciation expense and loss on sale of land are non-cash items, they would be added back to the net income (because they reduced the net income before). The idea is just to get the actual cash flows.

Then, a decrease in account receivable means that more cash has been received. This would be added to your operating activities.

Thirdly, there was a decrease in inventory, implying an increase in turnover, which translates to cash receipt / inflows.

Lastly, an increase in account payable means you hold on to cash, you are yet to settle your obligations. So, no cash outflows in this regard.

                 

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