Indicate whether each of the following would be added to or deducted from net income in determining net cash

Indicate whether each of the following would be added to or deducted from net income in determining net cash flow from operating activities by the indirect method:

a. Increase in notes payable due in 90 days to vendors
b. Decrease in prepaid expenses
c. Increase in merchandise inventory
d. Loss on disposal of fixed assets
e. Decrease in accounts receivable
f. Decrease in salaries payable
g. Gain on retirement of long-term debt
h. Increase in notes receivable due in 90 days from customers
i. Depreciation of fixed assets
j. Amortization of patent
k. Decrease in accounts payable


Answer:
a. added
b. added
c. deducted
d. added
e. added
f. deducted
g. deducted
h. deducted
i. added
j. added
k. deducted

Curwen Inc. reported net cash flow from operating activities of $357,500 on its statement of cash flows for the year

Curwen Inc. reported net cash flow from operating activities of $357,500 on its statement of cash flows for the year ended December 31, 2014. The following information was reported in the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method:


Decrease in income taxes payable $ 7,700
Decrease in inventories 19,140
Depreciation 29,480
Gain on sale of investments 13,200
Increase in accounts payable 5,280
Increase in prepaid expenses 2,970
Increase in accounts receivable 14,300


a. Determine the net income reported by Curwen Inc. for the year ended December 31, 2014.
b. Briefly explain why Curwen’s net income is different than net cash flow from operating activities.


Answer:


a. Net cash flow from operating activities…………………………… $357,500
Add: Increase in accounts receivable…………………………… $14,300
Increase in prepaid expenses……………………………… 2,970
Decrease in income taxes payable………………………… 7,700
Gain on sale of investments 13,200 38,170
$395,670
Deduct: Depreciation……………………………………………… $29,480
Decrease in inventories………………………………… 19,140
Increase in accounts payable…………………………… 5,280 53,900
Net income, per income statement………………………………… $341,770
b. Curwen’s net income differed from cash flows from operations because of:
● $29,480 of depreciation expense which has no effect on cash flows from
operating activities,
● a $13,200 gain on the sale of investments. The proceeds from this sale, which include
the gain, are reported in the Investing Activities section of the statement of cash flows.
● Changes in current operating assets and liabilities that are added or deducted,
depending on their effect on cash flows:
Increase in accounts receivable, $14,300
Increase in prepaid expenses, $2,970
Decrease in income taxes payable, $7,700
Decrease in inventories, $19,140
Increase in accounts payable, $5,280