Exercise 8: Net cash provided/used by operating activities – indirect method

Learning objective:
This exercise illustrates the computation of net cash provided (or used) by operating activities when an indirect method is used by the company for preparing its statement of cash flows.

Exercise 8 (a):

Meta Company uses indirect method for preparing its statement of cash flows. It reported a net income of $100,000 for the year 2024.

During the year 2024, the working capital accounts of the company were changed as follows:

• Increase in accounts receivable: $22,000
• Increase in accounts payable: $18,600
• Increase in inventory: $14,800
• Decrease in non-trade notes payable: $30,000
• Increase in available for sale securities: $32,000

The depreciation expense was $34,000 for the year 2024.

Required: Compute net cash provided (or used) by operating activities using indirect method.

Solution:

The changes in the following working capital items have not been considered in above computation:

• Decrease in non-trade notes payable: Any cash flow relating to non-trade notes payable is reported in the financing activities section of the statement of cash flows.
• Increase in available for sale securities: Any cash flow relating to available for sale securities is reported in the investing activities section of the statement of cash flows.

Exercise 8 (b):

Beta Company provides the following information for the year 2024:

• Net loss: $$35,000
• Increase in accounts receivable: $4,050
• Depreciation expense: $42,000

Required: Compute the net cash provided (or used) by operating activities using indirect method.

Solution