At the end of the first year of operations,the balance sheet of Midwood Medical Supply showed the following account 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.Solely on the basis of this information,net cash flow from operating activities is:
A)$78,000.
B)$82,000.
C)$77,000.
D)$80,000.

Question

Quizplus · Accepted Answer

Net cash flow from operating activities using the indirect method starts with net income and adjusts for non-cash expenses and changes in working capital. Starting with net income of $79,000 and adding back the non-cash depreciation expense of $5,000 gives $84,000. Adjusting for the increase in Accounts Receivable ($5,000) and Inventory ($3,000), which are uses of cash, reduces the amount by $8,000 ($5,000 + $3,000). The increase in Accounts Payable ($6,000) is a source of cash, adding back to the total. Therefore, the net cash flow from operating activities is $82,000 ($84,000 - $8,000 + $6,000). However, the inclusion of Unexpired Insurance in the calculation was incorrect as it does not affect the net cash flow from operating activities directly in this context. The correct calculation should only consider net income, depreciation, and changes in working capital (Accounts Receivable, Inventory, Accounts Payable), leading to a different result. Given the options and the mistake in the explanation, the correct calculation aligns with option D) $80,000, considering the error in the initial reasoning.

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