ExpertHard1 markMultiple Choice
CPA · Question 01 · Area I: Financial Reporting
Madison Inc. reported the following for Year 1:<br/>- Net income: $200,000<br/>- Depreciation expense: $80,000<br/>- Amortization of bond premium: $5,000<br/>- Gain on sale of equipment: $15,000<br/>- Increase in accounts receivable: $30,000<br/>- Decrease in inventory: $20,000<br/>- Increase in accounts payable: $25,000<br/>- Decrease in accrued liabilities: $10,000<br/><br/>Using the indirect method, what is Madison Inc.'s cash flow from operating activities for Year 1?
Madison Inc. reported the following for Year 1:<br/>- Net income: $200,000<br/>- Depreciation expense: $80,000<br/>- Amortization of bond premium: $5,000<br/>- Gain on sale of equipment: $15,000<br/>- Increase in accounts receivable: $30,000<br/>- Decrease in inventory: $20,000<br/>- Increase in accounts payable: $25,000<br/>- Decrease in accrued liabilities: $10,000<br/><br/>Using the indirect method, what is Madison Inc.'s cash flow from operating activities for Year 1?
Answer options:
A.
$265,000
B.
$270,000
C.
$280,000
D.
$290,000
How to approach this question
Start with net income, add back non-cash expenses (depreciation), subtract non-cash income reductions (bond premium amortization), remove non-operating items (gain on sale), then adjust for working capital changes using the rule: increases in assets are uses of cash (subtract), decreases in assets are sources of cash (add), increases in liabilities are sources of cash (add), decreases in liabilities are uses of cash (subtract).
Full Answer
A.$265,000✓ Correct
Under ASC 230, the indirect method starts with net income and adjusts for non-cash items and working capital changes. Bond premium amortization reduces the carrying value of bonds and reduces interest expense below cash outflow, so it's subtracted. The gain on sale is removed because it's an investing activity. Working capital changes follow the cash flow impact rules.
Common mistakes
Adding the gain on sale instead of subtracting it, incorrectly treating bond premium amortization as an addition, or misdirecting working capital changes
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