Gutierrez Company reported net income of $225,000 for 2017. Gutierrez also reported depreciation expense of $45,000 and a loss of $5,000 on the disposal of equipment. The comparative balance sheet shows a decrease in accounts receivable of $15,000 for the year, a $17,000 increase in accounts payable, and a $4,000 decrease in prepaid expenses.

Instructions

Prepare the operating activities section of the statement of cash flows for 2017. Use the indirect method.

Prepare the operating activities section—indirect method.

                        Gutierrez Company

                       Cash Flow statement

                          for the year 2017

                                                                     $

Net Income                                              225,000                

+ Depreciation                                            45,000

+ Decrease in receivable                           15,000

+ Increase in payable                                  17,000

+ Decrease in prepaid expenses              4,000

Net cash flow from operating activities  306,000  

Explanation:

Depreciation is an non cash expense so it will be added to the net profit for the calculation of cash flow from operating activities. Decrease in receivable, Increase in payable  and decrease in prepaid expenses result in the inflow of cash. So, they are all added in the operating income value.

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