Income Adjustment from Accounts Payable and Receivable — Practice Questions
To calculate the amount of cash provided by a company’s operating activities, you need to consider net income, accounts payable, and accounts receivable. The following practice questions provide two different scenarios and ask you to add up the cash from operating activities.
During a year, a company reports a net income of $20,000 and an accounts payable increase of $5,000. No other operating assets or liabilities changed. How much was cash provided by operating activities?
During a year, a company reports a net income of $50,000, an accounts receivable increase of $5,000, and an accounts payable decrease of $2,000. How much was cash provided by operating activities?
Answers and explanations
The increase in accounts payable must be added to net income to calculate cash from operating activities. Thus, the net income of $20,000 plus the increase in accounts payable of $5,000 equals $25,000 of cash provided by operating activities.
The increase in accounts receivable and the decrease in accounts payable must be deducted from net income. Therefore, the net income of $50,000 less the increase in accounts receivable of $5,000 less the decrease in accounts payable of $2,000 equals $43,000 of cash provided by operating activities.
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