he net income reported on the income statement for the current year was $255,000. Depreciation recorded on fixed assets and amortization of patents for the year were $30,000 and $4,000, respectively. Balances of current asset and current liability accounts at the end and at the beginning of the year are as follows:
Cash $50,000 $60,000
Accounts receivable 112,000 108,000
Inventories 105,000 93,000
Prepaid expenses 4,500 6,500
Accounts payable (merchandise creditors) 75,000 89,000
What is the amount of cash flows from operating activities reported on the statement of cash flows prepared by the indirect method?
Feedback: First, calculate the amount of change of the balance sheet items:
End Beginning Change
Cash $50,000 $60,000 $-10,000
Accounts receivable 112,000 108,000 +4,000
Inventories 105,000 93,000 +12,000
Prepaid expenses 4,500 6,500 -2,000
Accounts payable (merchandise creditors) 75,000 89,000 -14,000
An increase in a current asset and a decrease in current liabilities must be deducted from net income while the opposite is added. Noncash items must be added back to net income. This results in the following: Net income + depreciation + amortization - increase in accounts receivable - increase in inventory + decrease in prepaid expenses and - decrease in accounts payable = $255,000 + $30,000 + $4,000 - $4,000 - $12,000 + $2,000 - $14,000 = $261,000.