A company had net income of $890,000. Depreciation expense is $110,000. During the year, accounts receivable and inventory increased $60,000 and $160,000, respectively. Prepaid expenses and accounts payable decreased $8,000 and $16,000, respectively. There was also a loss on the sale of equipment of $12,000. How much cash was provided by operating activities?
A)$760,000.
B)$784,000.
C)$1,080,000.
D)$1,128,000.

Question

Quizplus · Accepted Answer

The cash provided by operating activities is calculated using the indirect method of cash flow statement. We start with the company's net income of $890,000 and make adjustments for non-cash expenses such as depreciation expense of $110,000. 
Then we make adjustments for changes in current assets and liabilities as follows:
- Increase in accounts receivable of $60,000: This represents cash that was not collected during the year, so we subtract it from net income.
- Increase in inventory of $160,000: This represents cash used to purchase inventory, so we subtract it from net income.
- Decrease in prepaid expenses of $8,000: This represents cash that was used to pay for expenses in advance, so we add it back to net income.
- Decrease in accounts payable of $16,000: This represents cash that was used to pay for expenses that were previously recorded as accounts payable, so we subtract it from net income.
- Loss on sale of equipment of $12,000: This represents a non-operating expense, so we add it back to net income.

Putting all of these adjustments together, we get:
Cash provided by operating activities = Net income + Non-cash expenses - Changes in current assets and liabilities
= $890,000 + $110,000 - $60,000 - $160,000 + $8,000 + $16,000 + $12,000
= $784,000

Therefore, the correct answer is B.

A Company Had Net Income of $890,000