Question

Exercise 12-5 Net Cash Provided by Operating Activities [LO12-2]

Changes in various accounts and gains and losses on the sale of assets during the year for Argon Company are given below:

Item		Amount
Accounts receivable	$	79,000	decrease
Inventory	$	118,000	increase
Prepaid expenses	$	3,600	decrease
Accounts payable	$	42,000	decrease
Accrued liabilities	$	9,300	increase
Income taxes payable	$	15,700	increase
Sale of equipment	$	8,300	gain
Sale of long-term investments	$	12,000	loss

Required:

For each item, indicate whether the dollar amount should be added to or deducted from net income under the indirect method when computing the net cash provided by operating activities for the year.

Answer 1

Accounts receivable : $79000 will be added to the net income. Since accounts receivable is decreased, it means that receivables have been collected and cash would have been collected or increased.

Inventory : $118000 will be deducted from net income becuase inventory is increased means cash would be spent on purchasing the inventory.

Prepaid expenses : $3600 will be added to the net income. Decrease in prepaid expenses means a charge to the net income this year for which there is no cash outflow. So, it will be added back to the net income.

Accounts Payable : $42000 will be deducted from net income as a decrease in accounts payable means cash has been spent on paying the current liability of payables.

Accrued liabilities : $9300 will be added to net income. Increase in accrued liabilities had previously lowered net income, but since no cash is paid for them, so we have to add them back to net income.

Income taxes payable : $15700 will be added to net income. Increase in income taxes payable had previously lowered net income, but since no cash is paid for them, so we have to add them back to net income.

Sale of equipment : $8300 will be deducted from net income. Gain on sale of equipment had increased net income earlier. Since, there is no cash provided on gain, so we will deduct it from the net income.

Sale of long term investments: $12000 will be added to the net income. Loss on sale of long term investments had decreased net income earlier. Since, there is no cash incurred on loss, so we will add it back to the net income.