Exercise 8 (Net cash provided/used by operating activities – indirect method )

Exercise 8 (a):

The Meta company uses indirect method for preparing its statement of cash flows. It reported a net income of $100,000 for the year 2016.

During the year 2016, the working capital accounts were changed as follows:

• Increase in accounts receivable: $22,000
• Increase in accounts payable: $18,600
• Increase in inventory: $14,800
• Decrease in non-trade notes payable: $30,000
• Increase in available for sale securities: $32,000

The depreciation expense was $34,000 for the year 2016.

Required: Compute net cash provided (or used) by operating activities using indirect method.

Solution:

The changes in the following working capital items have not been considered in above computation:

• Decrease in non-trade note payable: Any cash flow relating to non-trade notes payable is reported in financing activities section of statement of cash flows.
• Increase in available for sale securities: Any cash flow relating to available for sale securities is reported in investing activities section of statement of cash flows.

Exercise 8 (b):

The Beta company provides only the following information for the year 2016:

• Net loss: $$35,000
• Increase in accounts receivable: $4,050
• Depreciation expense: $42,000

Required: Compute net cash provided (used) by operating activities of Beta company using indirect method.

Solution