Software Distributors reports net income of $65,000. Included in that number is depreciation expense of $15,000 and a loss on the sale of land of $6,000. A comparison of this year's and last year's balance sheets reveals a decrease in accounts receivable of $28,000, a decrease in inventory of $37,000, and an increase in accounts payable of $45,000.

Required:

Prepare the operating activities section of the statement of cash flows using the indirect method.

Software Distributors

Statement of cash flows (extract)

Cash flows from operations

Net income $65,000

Depreciation expense 15,000

Loss on sale of land 6,000

Decrease in accounts receivable 28,000

Decrease in inventory 37,000

Increase in account payable 45,000

Net cash flows from operating activities $196,000

Explanation:

In preparing the cash flows from operations, the net income has to come first. Being that depreciation expense and loss on sale of land are non-cash items, they would be added back to the net income (because they reduced the net income before). The idea is just to get the actual cash flows.

Then, a decrease in account receivable means that more cash has been received. This would be added to your operating activities.

Thirdly, there was a decrease in inventory, implying an increase in turnover, which translates to cash receipt / inflows.

Lastly, an increase in account payable means you hold on to cash, you are yet to settle your obligations. So, no cash outflows in this regard.