Question

Martinez, Inc. reported net income of $2.5 million in 2007. Depreciation for the year was $160,000, accounts receivable decreased $350,000, and accounts payable decreased $280,000. Compute net cash provided by operating activities using the indirect approach.which accounts do you add and which ones do you subtract?

Answer 1

Answer:

$2,730,000

Explanation:

Operating activities: It includes those transactions which affect the working capital after net income. The increase in current assets and a decrease in current liabilities would be deducted whereas the decrease in current assets and an increase in current liabilities would be added.  

These changes in working capital would be adjusted. Moreover, the depreciation expense is added to the net income

The preparation of the Cash Flows from Operating Activities—Indirect Method is shown below:

Cash flow from Operating activities - Indirect method

Net income $2,500,000

Adjustment made:

Add : Depreciation expense $160,000

Add: Decrease in accounts receivable $350,000

Less: Decrease in accounts payable -$280,000

Total of Adjustments $230,000

Net Cash flow from Operating activities             $2,730,000