Use the following information and the indirect method to calculate the net cash provided or used by operating activities: Income before taxes…………………………………………… $14,000
Depreciation expense..………………………………………… 12,000
Payment on mortgage payable………………………………… 15,000
Gain on sale of land…………………………………………… 7,500
Increase in merchandise inventory……………………………. 2,050
Increase in accounts payable………………………………….. 6,150
Proceeds from sale of land……………………………………. 8,000
Income taxes paid……………………………………………... 1,700

Question

Quizplus · Accepted Answer

To calculate the net cash provided by operating activities using the indirect method, start with the income before taxes ($14,000), add back non-cash expenses (depreciation expense of $12,000), and adjust for the changes in working capital (increase in inventory reduces cash by $2,050, increase in accounts payable increases cash by $6,150). The gain on sale of land ($7,500) is subtracted because it does not affect operating cash flow. The payment on mortgage payable and proceeds from the sale of land are financing and investing activities, respectively, and do not affect operating activities. Income taxes paid ($1,700) is a cash outflow for operating activities. Therefore, the calculation is $14,000 + $12,000 - $7,500 - $2,050 + $6,150 - $1,700 = $20,900.

Use the Following Information and the Indirect Method to Calculate