A company reports net income of $52,100, which included depreciation expense of $45,200; amortization expense of $22,400; and a loss from sale of equipment of $14,200. Its comparative balance sheet shows the following changes: accounts receivable increased $32,400; inventory decreased $14,200; prepaid insurance decreased $9,200; and accounts payable increased $13,700.Compute net cash provided by operating activities using the indirect method.
Question
A company reports net income of 45,200; amortization expense of 14,200. Its comparative balance sheet shows the following changes: accounts receivable increased 14,200; prepaid insurance decreased 13,700.Compute net cash provided by operating activities using the indirect method.
Solution
To calculate the net cash provided by operating activities using the indirect method, we start with the net income and then add or subtract items to convert that amount to cash basis. Here's how:
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Start with the net income: $52,100
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Add back non-cash expenses:
- Depreciation expense: $45,200
- Amortization expense: $22,400
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Add back losses (or subtract gains) from sale of assets:
- Loss from sale of equipment: $14,200
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Adjust for changes in operating assets and liabilities:
- Increase in accounts receivable (a use of cash): -$32,400
- Decrease in inventory (a source of cash): $14,200
- Decrease in prepaid insurance (a source of cash): $9,200
- Increase in accounts payable (a source of cash): $13,700
Now, add all these together:
$52,100 (net income)
- $45,200 (depreciation)
- $22,400 (amortization)
- $14,200 (loss on sale of equipment)
- $32,400 (increase in accounts receivable)
- $14,200 (decrease in inventory)
- $9,200 (decrease in prepaid insurance)
- 138,600
So, the net cash provided by operating activities is $138,600.
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