Question

Changes in Current Operating Assets and Liabilities—Indirect Method

Covington Corporation's comparative balance sheet for current assets and liabilities was as follows:

	Dec. 31, Year 2		Dec. 31, Year 1
Accounts receivable	$12,200		$15,500
Inventory	77,400		67,300
Accounts payable	18,000		21,400
Dividends payable	21,000		20,000

Adjust net income of $92,700 for changes in operating assets and liabilities to arrive at net cash flow from operating activities.

Answer 1

• All working forms part of the answer
• Under Indirect Method:

>Decrease in Current assets or Increase in Current Liabilities IS ADDED TO NET INCOME

>Increase in Current Asset or Decrease in Current Liabilities is DEDCUTED from NET INCOME.

• Working #1

	Dec. 31, Year 2	Dec. 31, Year 1	Increase (decrease) during Year 2
Accounts receivable	$               12,200.00	$                     15,500.00	$           (3,300.00)
Inventory	$               77,400.00	$                     67,300.00	$           10,100.00
Accounts payable	$               18,000.00	$                     21,400.00	$           (3,400.00)
Dividends payable	$               21,000.00	$                     20,000.00	$            1,000.00

• Requirement solved:

Net Income		$               92,700.00
Adjustments to reconcile Net Income to
Net Cash from operating activities
Decrease in Accounts receivables	$                               3,300.00
Increase in Inventories	$                           (10,100.00)
Decrease in Accounts Payable	$                             (3,400.00)
Increase in Dividends Payable	$                               1,000.00	$               (9,200.00)
Net Cash Flow from Operating Activities		$               83,500.00