Question

The following information is available from the current period financial statements:

Net income	$131,943
Depreciation expense	21,983
Increase in accounts receivable	14,002
Decrease in accounts payable	21,679

The net cash flow from operating activities using the indirect method is

Answer 1

As per the given information, the net cash flow from operating activities using the indirect method can be calculated as follows:

Cash flow from operating activities = Net Income + Depreciation expense - Increase in accounts receivable - Decrease in accounts payable = $131,943 + $21,983 - $14,002 - $21,679 = $118,245.

Therefore, Net Cash flow from operating activities = $118,245.

To find cash flow from operating activities, the adjustment of depreciation expense is given to the net income i.e the depreciation expense is added to the net income because depreciation expense is a non cash item and hence the same is not a cash outflow of the company, however the same has been already deducted in the net income in income statement the same is added back to the net income.

Increase in accounts receivable represents cash outflow as the amount of accounts receivable has been increased from the previous period and hence the same is deducted from net income to ascertain cashflow.

Decrease in accounts payable represents cash outflow as the amount of accounts payable has been decreased from the previous period and hence the same is deducted from net income to ascertain cashflow.