1. A company uses the indirect method to determine its cash flows from operating
ID: 2600718 • Letter: 1
Question
1. A company uses the indirect method to determine its cash flows from operating activities. Use the following information to determine its net cash provided or used by operating activities. Net income Depreciation expense Cash payment on note payable 8,000 Gain on sale of land Increase in inventory Increase in accounts payable 2.850 15,200 10,000 3,000 1,500 a. $23,550 used by operating activities b. $23,550 provided by operating activities c. $15,550 provided by operating activities d. $42,400 provided by operating activities e. $20,850 provided by operating activitiesExplanation / Answer
As gain on sale of land is not the ordinary activity i.e. company would not sale land on routine basis unless it is engaged in the business of sale and purchase of land.
therefore this transaction pertains to investing activity.
Increase in account payable means that company has purchased from creditors but did not pay accordingly,
for example, purchase of stock is $50000 put paid $40000 it means that old balance will increase by $10000, in order to eliminate this effect we have to add it in operating activity for reconcillation of cash balance.
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