At the end of the first year of operations, the balance sheet of West Palm Beach Industries had the following balances: Accounts Receivable, $5,000; Accounts Payable, $6,000; Inventory, $3,000; and Unexpired Insurance, $2,000.The corporation reported net income of $79,000 for the year, including depreciation expense of $5,000, and uses the indirect method of computing net cash flow from operating activities.Based on this information, net cash flow from operating activities is:
A)$82,000
B)$78,000
C)$80,000
D)$77,000

Question

Quizplus · Accepted Answer

To calculate the net cash flow from operating activities, we need to make adjustments to net income for non-cash items (such as depreciation) and changes in current assets and liabilities.

Starting with net income of $79,000, we add back the $5,000 in depreciation expense to get $84,000.

Next, we need to account for the changes in current assets and liabilities. Since Accounts Receivable and Inventory are both assets, an increase in these accounts would decrease cash flow from operations. Because Accounts Receivable did not change (stayed at $5,000) and we are not given any information about changes to inventory, we do not need to make any adjustments for these accounts.

Accounts Payable, on the other hand, is a liability. An increase in this account would increase cash flow from operations. Since accounts payable increased by $6,000, we add this amount to net income and depreciation to get a net cash flow from operating activities of $90,000.

However, we also need to consider the Unexpired Insurance account. Since this is an asset and the balance increased by $2,000, we need to subtract this amount from our calculation of net cash flow from operating activities. Therefore, our final answer is $80,000 (or choice C).

At the End of the First Year of Operations, the Balance