Majorn Auto Parts Store had net income of $81,000 for the year just ended. Majorn collected the following additional information to prepare its statement of cash flows for the year: Majorn uses the indirect method to prepare its statement of cash flows. What is Majorn's net cash provided by (used in) operating activities?
A) $41,000
B) $(53,000)
C) $185,000
D) $279,000

Question

Majorn Auto Parts Store had net income of $81,000 for the year just ended. Majorn collected the following additional information to prepare its statement of cash flows for the year:  Majorn uses the indirect method to prepare its statement of cash flows. What is Majorn's net cash provided by (used in) operating activities?
A) $41,000 
B) $(53,000) 
C) $185,000 
D) $279,000

Quizplus · Accepted Answer

The net cash provided by (used in) operating activities is calculated by starting with net income and making adjustments for non-cash items and changes in operating assets and liabilities. We are not given enough information to calculate this directly, but we are given changes in several accounts:
- Accounts receivable increased by $29,000 (which means that sales were made on credit and not collected in cash, resulting in a decrease in cash)
- Inventory increased by $17,000 (which means that more inventory was purchased than sold, resulting in a decrease in cash)
- Prepaid expenses increased by $2,000 (which means that the company paid for expenses in advance, resulting in a decrease in cash)
- Accounts payable increased by $16,000 (which means that the company purchased goods on credit and did not pay for them yet, resulting in an increase in cash)
- Salaries payable decreased by $23,000 (which means that the company paid wages owed from a prior period, resulting in a decrease in cash)
- Income taxes payable increased by $3,000 (which means that the company did not pay all of its income taxes owed for the year, resulting in an increase in cash)

To calculate the net cash provided by (used in) operating activities, we would start with net income of $81,000 and then make adjustments for these changes in operating assets and liabilities:
Net income: $81,000
Add back depreciation expense: $21,000
Decrease in accounts payable: $16,000
Decrease in salaries payable: $23,000
Increase in income taxes payable: $3,000
Adjustment for increase in accounts receivable: -$29,000
Adjustment for increase in inventory: -$17,000
Adjustment for increase in prepaid expenses: -$2,000
Net cash provided by (used in) operating activities: -$50,000
(Note: This is a cash outflow, so the answer is B)

Majorn Auto Parts Store Had Net Income of $81,000 for the Year