Question

Montego company's cash account has a balance of 14000 on January 1. Analysis of the company cash account during the year revealed the following information:

Decrease in interest payable 1000

Depreciation expense 30900

Gain on retirement of bonds 32300

Increase in accounts receivable 40000

Loss on sale on plant assets 5900

Net Income 78000

The net cash provided (used) by operating activities is:

o 23500

o 59500

o 59700

o 41500

o 94300

Answer 1

Option (d) is correct

In calculating the cash flows statement from indirect method, we will start with the net income. We will add back the non cash item of depreciation & loss on sale of plant assets in it. We will deduct gain on retirement of bonds in it. Then we will adjust the amount for increase or decrease in cash due to increase or decrease in current assets or current liabilities.Like, an increase in current assets will reduce cash, so we will deduct it and a decrease in current assets will increase cash, so we will add it. Similarly, an increase in current liabilities will increase cash, so it will be added and a decrease in current liabilities will reduce cash, so it will be deducted.

Calculation of cash flows from operating activities:

Description	Amount	Amount
Net income	78000
Add: Depreciation expense	30900
Less: Gain on retirement of bonds	(32300)
Add: Loss on sale of plant assets	5900
Less: Increase in accounts receivable	(40000)
Less: Decrease in interest payable	(1000)
Net cash provided by operating activities		41500