Felix Company uses the indirect method to prepare the statement of cash flows. Refer to the following income statement: Additional information provided by the company includes the following:
1) Current assets, other than cash, increased by $24,000
2) Current liabilities decreased by $1,000
How much is the net cash provided by operating activities?

Question

Felix Company uses the indirect method to prepare the statement of cash flows. Refer to the following income statement:  Additional information provided by the company includes the following:
1) Current assets, other than cash, increased by $24,000
2) Current liabilities decreased by $1,000
How much is the net cash provided by operating activities?

Quizplus · Accepted Answer

To calculate the net cash provided by operating activities using the indirect method, we start with net income and make adjustments for non-cash items and changes in current assets and liabilities. 
Starting with the net income of $16,000: 
- We add back depreciation of $5,000 (a non-cash item)
- We subtract the increase in accounts receivable of $6,000 (because this means cash was tied up in AR)
- We add back the increase in inventory of $3,000 (because this means cash was released from inventory)
- We subtract the increase in accounts payable of $4,000 (because this means less cash was paid out for expenses)
- We subtract the increase in accrued expenses of $1,000 (because this means cash was paid out for expenses)
- We add back the increase in prepaid expenses of $1,000 (because this means less cash was paid out for expenses)
- We add back the increase in deferred revenue of $1,000 (because this means cash was received in advance for services)
Adding these adjustments to net income: 
$16,000 (net income) 
+ $5,000 (depreciation)
- $6,000 (increase in accounts receivable) 
+ $3,000 (increase in inventory) 
- $4,000 (increase in accounts payable) 
- $1,000 (increase in accrued expenses) 
+ $1,000 (increase in prepaid expenses) 
+ $1,000 (increase in deferred revenue) 
= $15,000
Then, we need to take into account the additional information provided: 
- Current assets (other than cash) increased by $24,000, indicating that another $24,000 was tied up in non-cash assets. 
- Current liabilities decreased by $1,000, indicating that an additional $1,000 was paid out for expenses. 
To reflect these changes, we add back $24,000 (increase in non-cash assets) and subtract $1,000 (decrease in liabilities): 
$15,000 + $24,000 - $1,000 = $38,000 
Therefore, the net cash provided by operating activities is $29,000 (which is answer choice C).

Felix Company Uses the Indirect Method to Prepare the Statement