Cinno Company reported net income of $20,000 for the year ended December 31, 2011. During the year, inventories decreased by $7,000, accounts payable decreased by $8,000, depreciation expense was $10,000, and accounts receivable increased by $6,500. Net cash provided by operations in 2011, computed using the indirect method, was:
A) $10,500.
B) $22,500.
C) $38,500.
D) $51,500.

Question

Quizplus · Accepted Answer

Net income = $20,000
Depreciation expense = $10,000 (added back to net income since it's a non-cash expense)
Decrease in inventory = $7,000 (added back to net income since it represents cash that was tied up in inventory)
Decrease in accounts payable = $8,000 (subtracted from net income since it represents a use of cash)
Increase in accounts receivable = $6,500 (subtracted from net income since it represents a use of cash)

Therefore, net cash provided by operations = $20,000 + $10,000 + $7,000 - $8,000 - $6,500 = $22,500.

Cinno Company Reported Net Income of $20,000 for the Year