Hardware suppliers reports net income of $157,000. included in net income is a gain on the sale of land of $16,000. a comparison of this year’s and last year’s balance sheets reveals an increase in accounts receivable of $27,000, an increase in inventory of $16,000, and a decrease in accounts payable of $47,000.required: prepare the operating activities section of the statement of cash flows using the indirect method. (list cash outflows and any decrease in cash as negative amounts.)

Cash Flow Statement;

Operating Activities;

Net income                                                                              $157,000

less/add gain or loss on disposal of asset. -Gain                -$  16,000

Movement in working capital;

Increase in account receivable    -$27,000

Increase in account inventory      -$16,000

Decrease in account payable       -$47,000                          -$90,000

Net cash flow from operating activities                                   $51,000                                                                  

Explanation:

When indirect method is used to prepare cash flow statments the operating activities is most affected. Unlike in the direct method that starts with receipt from customers,the indirect method starts with net income and add back all non-cash movement items like depreciation, amortisation, impairment etc. Also gains and losses that are not recurrent are removed from operating activities or out of the net income and treated as investment activities. In addition, working capital items like; account payable, inventory and account receivable are adjusted and included as part of operating activities. If there was an increase in account receivable or inventory, it implies cash outflow ( more customers owe money and stock were purchased). However, decrease in account payable indicated outflow. implying payment of suppliers as their indebtedness becomes due.

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