In calculating cash flows from operating activities using the indirect method, a gain on the sale of

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Use the following information to calculate net cash flow from operating activities using indirect method:Net Income7,000Depreciation Expense 1,000Increase in Accounts Receivable4,400Increase in Prepaid Rent7,000Decrease in Prepaid Insurance1,300Increase in Accounts Payable14,000Increase in Wages Payable 1,000Decrease in Income Tax Payable700Gain on Sale of Equipment1,800
The correct option is A10,400Cash flows from Operating Activities:Net Income7,000Depreciation Expense 1,000Gain on Sale of Equipment−1,800Increase in Accounts Receivable−4,400Increase in Prepaid Rent−7,000Decrease in Prepaid Insurance1,300Increase in Accounts Payable14,000Increase in Wages Payable 1,000Decrease in Income Tax Payable−700Net Cash Flow from Operating Activities10,400
What is the indirect method to calculate cash flow from operating activities?
How do you calculate cash flow from operating activities?
When using the indirect method losses are subtracted from net income in computing cash flow from operations?
How is the statement of cash flows prepared using the indirect method?

Question

Use the following information to calculate net cash flow from operating activities using indirect method:Net Income7,000Depreciation Expense 1,000Increase in Accounts Receivable4,400Increase in Prepaid Rent7,000Decrease in Prepaid Insurance1,300Increase in Accounts Payable14,000Increase in Wages Payable 1,000Decrease in Income Tax Payable700Gain on Sale of Equipment1,800

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Solution

The correct option is A10,400Cash flows from Operating Activities:Net Income7,000Depreciation Expense 1,000Gain on Sale of Equipment−1,800Increase in Accounts Receivable−4,400Increase in Prepaid Rent−7,000Decrease in Prepaid Insurance1,300Increase in Accounts Payable14,000Increase in Wages Payable 1,000Decrease in Income Tax Payable−700Net Cash Flow from Operating Activities10,400

What is the indirect method to calculate cash flow from operating activities?

Under the indirect method, cash flow from operating activities is calculated by first taking the net income from a company's income statement. Because a company's income statement is prepared on an accrual basis, revenue is only recognized when it is earned and not when it is received.

How do you calculate cash flow from operating activities?

Operating Cash Flow = Operating Income + Depreciation – Taxes + Change in Working Capital. Cash Flow Forecast = Beginning Cash + Projected Inflows – Projected Outflows = Ending Cash.

When using the indirect method losses are subtracted from net income in computing cash flow from operations?

A gain increases net income but cash is not received so it must be subtracted out of net income when converting to a cash basis from operating activities. A loss reduces net income but actual cash is not paid out so this must be added back to net income.

How is the statement of cash flows prepared using the indirect method?

The indirect method for the preparation of the statement of cash flows involves the adjustment of net income with changes in balance sheet accounts to arrive at the amount of cash generated by operating activities.