Adama Company reported a net loss of $6,000 for the year ended December 31, 2014. During the year, accounts receivable increased $15,000, merchandise inventory decreased $12,000, accounts payable decreased by $20,000, and depreciation expense of $12,000 was recorded. During 2014, operating activities
A)used net cash of $17,000.
B)used net cash of $29,000.
C)provided net cash of $24,000.
D)provided net cash of $21,000.

Question

Quizplus · Accepted Answer

Operating activities are calculated using the indirect method. The increase in accounts receivable means that sales were made, but cash was not yet received. This represents a use of cash. The decrease in inventory represents a source of cash since it implies that inventory was sold, and cash was received in return. The decrease in accounts payable also represents a use of cash. Lastly, the depreciation expense is a non-cash item, so it is added back.

Net Cash Used = (Increase in Accounts Receivable) + (Decrease in Inventory) + (Decrease in Accounts Payable) + (Depreciation Expense)
Net Cash Used = ($15,000) + ($12,000) + ($20,000) + ($12,000)
Net Cash Used = $-17,000 or -$17,000
Therefore, the answer is A.

Adama Company Reported a Net Loss of $6,000 for the Year