Shaw Associates uses the indirect method for preparing the statement of cash flows.The following accounts and balances were drawn from the company's accounting records: $$\begin{array} { l c c }
\text { Account Title } & \text { Beginning } & \text { Ending } \
\text { Accounts receivable } & \$ 30,000 & \$ 40,000 \
\text { Prepaid insurance } & \$ 24,600 & \$ 1,000 \
\text { Accounts payable } & \$ 24,000 & \$ 25,800 \
\text { Unearned revenue } & \$ 6,400 & \$ 3,800
\end{array}$$ Net income for the period was $42,000.The net cash flows from operating activities equal:
A) $37,200.
B) $34,800.
C) $49,200.
D) $40,000.

Question

Shaw Associates uses the indirect method for preparing the statement of cash flows.The following accounts and balances were drawn from the company's accounting records: $$\begin{array} { l c c } 
\text { Account Title } & \text { Beginning } & \text { Ending } \
\text { Accounts receivable } & \$ 30,000 & \$ 40,000 \
\text { Prepaid insurance } & \$ 24,600 & \$ 1,000 \
\text { Accounts payable } & \$ 24,000 & \$ 25,800 \
\text { Unearned revenue } & \$ 6,400 & \$ 3,800
\end{array}$$ Net income for the period was $42,000.The net cash flows from operating activities equal:
A) $37,200.
B) $34,800.
C) $49,200.
D) $40,000.

Quizplus · Accepted Answer

Since the indirect method is used, we start with net income and make adjustments for non-cash expenses and changes in working capital. Without additional information, we can't determine what those adjustments are, but we can see that the net income is $42,000. Therefore, we can eliminate choices C and D, which have higher amounts, and choose between A and B. Since net income is positive, we can eliminate choice A, which is a negative number. Therefore, the correct answer is B, $34,800, which is lower than net income because of adjustments made to reconcile net income to net cash flows from operating activities.

Shaw Associates Uses the Indirect Method for Preparing the Statement