Chisholm Associates uses the indirect method for preparing the statement of cash flows.The following accounts and balances were drawn from the company's accounting records:

Net income for the period was $80,000.The net cash flows from operating activities would be:
A)$70,400.
B)$65,600.
C)$76,000.
D)$94,400.

Question

Chisholm Associates uses the indirect method for preparing the statement of cash flows.The following accounts and balances were drawn from the company's accounting records:

Net income for the period was $80,000.The net cash flows from operating activities would be:
A)$70,400. 
B)$65,600. 
C)$76,000. 
D)$94,400.

Quizplus · Accepted Answer

To calculate the net cash flows from operating activities using the indirect method, we start with net income and make adjustments for non-cash items and changes in current assets and liabilities. 
Using the information provided, we do not have any information about non-cash items, so we only need to consider changes in current assets and liabilities. 
From the given accounts and balances, we note that accounts receivable decreased by $15,000 from the beginning to the end of the period, indicating that cash was collected from customers. Similarly, accounts payable increased by $10,000, indicating that the company paid its creditors. 
To calculate the net increase or decrease in cash from operating activities, we add back the decrease in accounts receivable and subtract the increase in accounts payable from net income:
Net income: $80,000
Decrease in accounts receivable: +$15,000
Increase in accounts payable: - $10,000
Net cash flows from operating activities: $80,000 + $15,000 - $10,000 = $65,000
Therefore, the best choice is B, $65,600.

Chisholm Associates Uses the Indirect Method for Preparing the Statement