Concept #1: Indirect Method Summary

Example #1: Indirect Method (1)

Example #2: Indirect Method (2)

Example #3: Indirect Method (3)

Practice: A company reported net income of $250,000. Depreciation and amortization totaled $120,000. In total, Current assets excluding cash increased by $25,000 and current liabilities increased by 16,000. The company also had a gain on the sale of equipment of $4,000. Using the indirect method, what are cash flows from operating activities?

Practice: A company had net income of $240,000. Depreciation expense was $36,000. During the year, the accounts receivable and Inventory increased $12,000 and $25,000, respectively. Accrued expenses and prepaid expenses decreased by $3,000 and $14,000, respectively. There was also a gain on the sale of equipment of $4,000. How much cash was provided by operating activities?

Additional Problems
Kela Corporation reported 2009 net income of $450,000 including the effects of depreciation expense, $60,000, and amortization expense on a patent, $10,000. Also, cash of $50,000 was borrowed on a 5-year note payable. Based on this data, total cash inflow from operating activities for 2009 was A) $440,000 B) $470,000 C) $520,000 D) $570,000 E) None of the above is correct.
The statement of cash flows prepared under the indirect method starts with A. cash receipts and cash expenditures to compute net cash inflow or outflow from operating activities. B. the net income determined using the accrual method of accounting and adjusts it to the cash flow from operating activities. C. the net income determined using the cash basis of accounting and adjusts it to an accrual basis. D. cash receipts and cash expenditures to compute net cash inflow or outflow from investing activities.
When using the indirect method of preparing the "cash flows from operating activities" section of a statement of cash flows, a net increase between the beginning and ending balances of net accounts receivable will A) be added to net income. B) be deducted from net income. C) not be considered. D) be shown as deferred revenues.
Owl Fitness’ financial statements show the following: net income of $100,000; depreciation expense $20,000; amortization expense of $15,000; loss on sale of equipment $10,000; gain on bond retirement $2,000; accounts receivable increased $5,000; Merchandise inventory increased $8,000; prepaid expenses decreased $6,000; installment notes increased by $7,000; wages payable increased by $2,000 and Accounts payable decreased by $4,000. Calculate net cash flow from operating activities.
The statement of cash flows (indirect method) reports depreciation expense as an addition to net income because depreciation A) causes an inflow of funds for the replacement of assets. B) reduces reported net income of the period but does not involve an outflow of cash for that period. C) is a direct use of cash. D) reduces reported net income and causes an inflow of cash. E) None of the above is correct.
Allen Company's 2009 income statement reported total revenues, $850,000 and total expenses (including $40,000 depreciation) of $720,000. The 2009 balance sheet reported the following: accounts receivable—beginning balance, $50,000 and ending balance, $40,000; accounts payable—beginning balance, $22,000 and ending balance, $28,000. Therefore, based only on this information, the 2009 net cash inflow from operating activities was  A. $126,000 B. $166,000 C. $174,000 D. $186,000
Which of the following statements about cash flows from operating activities, in a statement of cash flows prepared under the indirect method, is correct?  A. An increase in accounts receivable would be subtracted from net income. B. An increase in salaries payable would be subtracted from net income. C. An increase in inventory would be added to net income. D. Depreciation expense would be subtracted from net income.
The statement of cash flows (indirect method) reports depreciation expense as an addition to net income because depreciation  A. causes an inflow of funds for the replacement of assets. B. reduces reported net income of the period but does not involve an outflow of cash for that period. C. is a direct use of cash. D. reduces reported net income and causes an inflow of cash.
Matlock Co. reported net income of $10,000 on its income statement for the year ended December 31, 2012. During 2012, accounts receivable decreases by $4,000, merchandise inventory decreased by $6,000, accounts payable increased by $2,000, and depreciation expense was $8,000. Matlock's net cash flow from operating activities was: A. $10,000 B. $18,000 C. $19,000 D. $30,000
When a company increases accounts payable from one year to the next, the effect on cash flows A) is a decrease in cash caused by paying down our debt to vendors. B) is an increase in cash because we have not paid cash for all the inventory and services purchased on credit during the period. C) is a decrease to cash because we will have to pay these liabilities in the future. D) is an increase to cash because we have received cash from vendors.
A negative net cash flow from  operating activities: A. indicates the company is selling its assets for more than it cost to purchase them which is a good sign for cash flows B. indicates the company is paying more money to owners and creditors than it is receiving from them C. indicates the company is re-investing in itself in order to grow and expand D. indicates the company had a net loss using the cash basis of accounting E. indicates the company is selling off its long term assets which is not a good sign for financial health
The net cash provided by operating activities is affected by a) A change in merchandise inventory. b) A purchase of land for cash. c) The issue of bonds payable for cash. d) Proceeds of cash investments by stockholders.
Net income for Trex Outdoors in 2009 was $9,154 (in thousands). There was an addition to net income on the statement of cash flows for $2,106 (in thousands) for the change in accounts receivable. The accounts receivable balance on December 31, 2008 was $20,851 (in thousands). How much was the accounts receivable balance on December 31,  2009?  A. $11,260 (in thousands) B. $18,745 (in thousands) C. $22,957 (in thousands) D. $20,851 (in thousands)
The N Company's cash balance at January 1, 2013, was $150,000. The following information was reported on the company statement of cash flows for 2013: Net income                                                                         $360,000 Depreciation and amortization                                              110,000 Increase in accounts receivable                                             58,000 Increase in inventory                                                            120,000 Decrease in accounts payable                                               40,000 Dividends paid to shareholders                                              25,000 Proceeds from sale of common stock                                  500,000 Repayment of bonds payable                                              200,000 Proceeds from sale of equipment,book value = $84,000      50,000 Purchase of land and building                                             300,000 The N Company's balance sheet would report the balance of Cash on December 31, 2013 a) $311,000. b) $410,000 c) $426,000 d) $461,000.
Given the following information and using the indirect method, calculate the cash flows from operating activities.                                                             End of Year                             Beginning of Year Cash                                                      $ 38,500                                     $ 44,200 Accounts receivable (net)                         79,200                                        68,800 Inventories                                                90,700                                        81,100 Prepaid expenses                                       4,500                                          6,500 Accounts payable                                     65,000                                         72,800 Salaries Payable                                        5,900                                           5,400 Net Income reported on the Income Statement for the current year was $115,000, which included a loss on sale of land of $8,000. Depreciation recorded on office equipment for the year amounted to $48,000. a) $129,700 b) $137,700 c) $144,700 d) $145,700
Interest earned on a long-term note receivable would be included in which section of the statement of cash flows? a. Operating b. Financing c. Investing d. Noncash Investing and Financing Disclosure
The balances of the current asset and current liability accounts at the beginning and end of the year are listed below. Determine if the balance increased or decreased and indicate whether each of the following would be added to or deducted from net income in determining the net cash flow from operating activities using the indirect method.                                         End of                      Beginning of             Increase         Add or                                           Year                       Year                         (Decrease)     Deduct a)Accounts receivable      74,000                   84,100 b)Prepaid expenses           5,100                     6,600 c)Accounts payable          39,400                   33,200 d)Salaries payable              5,000                     7,000