Question

Changes in Current Operating Assets and Liabilities—Indirect Method
Mohammed Corporation's comparative balance sheet for current assets and liabilities was as follows:

Dec. 31, 20Y2
Dec. 31, 20Y1
Accounts receivable
$18,500

$18,300

Inventory
56,500

57,200

Accounts payable
11,400

10,400

Dividends payable
18,000

17,000

Adjust net income of $78,600 for changes in operating assets and liabilities to arrive at net cash flow from operating activities.
$

Answer 1

Computation the value of cash flow from operating activity is:

Cash flow from operating activity = Adjusted net income + Increase in value of accounts payable + Increase in value of dividends payable - Increase in value of receivables + Decrease in value of inventory

= $78,600 + $1,000 + $1,000 - $200 + $700

= $81,100

Hence, the cash flow from operating activity is $81,100.

Working Notes:

1.

Computation the increase in value of accounts payable is:

Increase in value of accounts payable = Accounts payable in Dec. 31, 20Y2 - Accounts payable in Dec. 31, 20Y1

= $11,400 - $10,400

= $1,000

Hence, the increase in value of accounts payable is $1,000.

2.

Computation the increase in value of dividends payable is:

Increase in value of dividends payable = Dividends payable in Dec. 31, 20Y2 - Dividends payable in Dec. 31, 20Y1

= $18,000 - $17,000

= $1,000

Hence, the increase in value of dividends payable is $1,000.

3.

Computation the increase in value of receivables is:

Increase in value of receivables = Accounts receivable in Dec. 31, 20Y2 - Accounts receivable in Dec. 31, 20Y1

= $18,500 - $18,300

= $200

Hence, the increase in value of receivables is $200.

4.

Computation the decrease in value of inventory is:

Decrease in value of inventory = Inventory in Dec. 31, 20Y1 - Inventory in Dec. 31, 20Y2

= $57,200 - $56,500

= $700

Hence, the increase in value of inventory is $700.