Question

Given the following income statement and balance sheet data, select which items would be included in presenting the cash flow from operating activities section of the statement of cash flows using the indirect method:

Income Statement ($ millions)	2019
Sales	$50,000
Less: Cost of goods sold	33,400
Gross profits	16,600
Less: Cash operating expenses	13,600
Less: Depreciation expense	920
Less: Amortization of intangible assets	80
Operating profits (EBIT)	2,000
Less: Interest expense	290
Equity in earnings (loss) of affiliate	(50)
Gain (loss) on sale of fixed assets	80
Earnings before tax expense	1,740
Income tax expense	540
Net income	$1,200

Balance Sheet ($ millions)	2019	2018			2019	2019
Cash & equivalents	$500	$600		Accounts payable	$1,820	$2,200
Marketable securities	450	360		Other accrued expenses	2,180	2,050
Net receivables	4,200	4,050		Current portion of long-term debt	330	490
Inventories	6,110	6,190		Short-term debt	300	190
Other current assets	820	580		Other current liabilities	620	760
Total current assets	12,080	11,780		Total current liabilities	5,250	5,690
Gross fixed assets	22,320	20,860		Long-term debt	5,750	5,630
Less: Accum. depreciation	10,540	10,100		Deferred taxes	2,200	2,130
Net fixed assets	11,780	10,760		Other long-term liabilities	1,900	1,750
Investments in affiliates	480	530		Total liabilities	15,100	15,200
Intangible assets	600	680		Common stock	500	400
Other long-term assets	60	250		Additional paid-in capital	1,700	1,200
Total assets	$25,000	$24,000		Retained earnings	7,700	7,200
				Total stockholders’ equity	9,900	8,800
				Total liabilities and equity	$25,000	$24,000

		Add-back depreciation expense of $920
		subtract depreciation expense of $920
		add-back amortization of intangible assets of $80
		subtract amortization of intangible assets of $80
		subtract earnings recognized on investments in affiliates (equity in earnings of affiliate) of $50
		add earnings recognized on investments in affiliates (equity in earnings of affiliate) of $50
		add change in receivables of $150
		subtract change in receivables of $150
		add change in inventories of $80
		subtract change in inventories of $80
		add change in other current assets of $240
		subtract change in other current assets of $240
		add change in other noncurrent assets of $190
		subtract change in other noncurrent assets of $190
		add change in accounts payable of $380
		subtract change in accounts payable of $380
		add change in accrued expenses of $130
		subtract change in accrued expenses of $130
		add change in other current liabilities of $140
		subtract change in other current liabilities of $140
		add change in deferred taxes of $70
		subtract change in deferred taxes of $70
		add change in other noncurrent liabilities of $150
		subtract change in other noncurrent liabilities of $150
		add-back interest expense of $290
		add gain on sale of fixed assets of $80
		subtract gain on sale of fixed assets of $80

Answer 1

In the indirect method, the net income is taken as the first item, and adjustments are made for non-cash items and changes in working capital

The following items would be included :

• Add-back depreciation expense of $920. Depreciation is a non-cash expense, and hence should be added back to net income to calculate cash flow from operations
• add-back amortization of intangible assets of $80. Amortization is a non-cash expense, and hence should be added back to net income to calculate cash flow from operations
• add earnings recognized on investments in affiliates (equity in earnings of affiliate) of $50 - Share in earnings of affiliate is not a cash outflow, and hence should be added back to net income
• subtract change in receivables of $150 - Increase in current assets is a cash outflow
• add change in inventories of $80 - Decrease in current assets is a cash inflow
• subtract change in other current assets of $240 - Increase in current assets is a cash outflow
• subtract change in accounts payable of $380 - Decrease in current liabilities is a cash outflow
• add change in accrued expenses of $130 - Increase in current liabilities is a cash inflow
• subtract change in other current liabilities of $140 - Decrease in current liabilities is a cash outflow
• add-back interest expense of $290 - interest is not an operating expense
• subtract gain on sale of fixed assets of $80 - this gain is not an operating income