[Anonymous]

Martin Co. had net income of $70,000 during the year. Depreciation expense was $10,000. The following information is available:

Accounts receivable increase 20,000

Equipment gain on sale increase 10,000

Nontrade notes payable increase 50,000

Prepaid insurance increase 40,000

Accounts payable increase 30,000

What amount should Martin report as net cash provided by operating activities in its statement of cash flows for the year?

A. 0

B. $40,000

C. 50,000

D. 100,000

answer B

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Is the 40,000 from prepaid insurance or some combination of adding and subtracting of other items?

[okcpa2015]

Net Income – 70,000

Less AR – (20,000)

Less Gain – (10,000)

Less PPD – (40,000)

Add AP – 30,000

Add Depr – 10,000

Equals: $40,000

Make Sense?

FAR - 91
REG - 88
AUD - 98
BEC - 88

[Anonymous]

Why are you adding back depreciation?

[okcpa2015]

Depreciation is a non-cash item. It reduced accrual income but not cash income so you have to add it back to get cash income.

FAR - 91
REG - 88
AUD - 98
BEC - 88

[Oimie]

Just to clarify, when using the indirect method, we “modify” net income according to changes due to A/R and A/P since they directly affect net income. But prepaid expenses don't affect net income, so it's treated the same way as direct method right?

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[okcpa2015]

Yes, you have to have the cash outflow some where. For Cash Flow problems always do the Journal Entries if you get stuck.

Dr – PPD

CR – Cash

Cash outflow

FAR - 91
REG - 88
AUD - 98
BEC - 88

[Author]

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