ExpertHard1 markMultiple Choice
CPA · Question 01 · Area I: Financial Reporting
Orion Corp. is preparing its Statement of Cash Flows for the year ended December 31, Year 1, using the indirect method. The following information is available:<br/><br/>- Net Income: $450,000<br/>- Depreciation Expense: $60,000<br/>- Amortization of Bond Discount: $4,000<br/>- Gain on Sale of Equipment: $12,000<br/>- Equity in Earnings of Investee (Net of $10,000 dividends received): $25,000<br/>- Decrease in Accounts Receivable: $15,000<br/>- Increase in Inventory: $22,000<br/>- Decrease in Accounts Payable: $8,000<br/><br/>What is the net cash provided by operating activities?
Orion Corp. is preparing its Statement of Cash Flows for the year ended December 31, Year 1, using the indirect method. The following information is available:<br/><br/>- Net Income: $450,000<br/>- Depreciation Expense: $60,000<br/>- Amortization of Bond Discount: $4,000<br/>- Gain on Sale of Equipment: $12,000<br/>- Equity in Earnings of Investee (Net of $10,000 dividends received): $25,000<br/>- Decrease in Accounts Receivable: $15,000<br/>- Increase in Inventory: $22,000<br/>- Decrease in Accounts Payable: $8,000<br/><br/>What is the net cash provided by operating activities?
Answer options:
A.
$452,000
B.
$462,000
C.
$487,000
D.
$497,000
How to approach this question
Start with Net Income. Add non-cash expenses (depreciation, amortization). Subtract non-cash gains (gain on sale). Adjust for equity method: subtract the equity earnings reported in NI, add back dividends received (or subtract the net undistributed earnings). Adjust for changes in working capital: Current Assets (inverse relationship), Current Liabilities (direct relationship).
Full Answer
B.$462,000✓ Correct
B
Calculation:<br/>Net Income: $450,000<br/>+ Depreciation: $60,000<br/>+ Amortization of Bond Discount: $4,000 (Non-cash interest expense)<br/>- Gain on Sale of Equipment: ($12,000) (Remove investing activity gain)<br/>- Undistributed Equity Earnings: ($25,000) (The $25k is net of dividends; total earnings were $35k, dividends $10k. We remove the non-cash portion $25k included in NI)<br/>+ Decrease in AR: $15,000 (Source)<br/>- Increase in Inventory: ($22,000) (Use)<br/>- Decrease in AP: ($8,000) (Use)<br/>Total: $462,000.
Common mistakes
Adding the gain on sale instead of subtracting; mishandling the equity method adjustment (forgetting to remove the non-cash earnings); reversing the direction of working capital adjustments.
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