The following information is taken from the Operating Activities section of the statement of cash flows for the Parks Company for the year just ended:
|
Net income
|
|
$15,000
|
|
Adjustments to convert net income to cash basis:
|
|
|
|
Accounts receivable
|
$ 3,000
|
|
|
Gain on sale of equipment
|
(3,000)
|
|
|
Inventory
|
(7,000)
|
|
|
Accounts payable
|
4,000
|
|
|
Depreciation expense
|
11,000
|
|
|
Interest payable
|
(1,000)
|
|
|
Prepaid expenses
|
2,000
|
|
|
Income tax payable
|
(7,000)
|
2,000
|
|
Net cash inflow from operating activities
|
|
$17,000
|
The following information is taken from the company's income statement for the year just ended:
|
Sales
|
$96,000
|
|
Cost of goods sold
|
42,000
|
|
Gross margin
|
54,000
|
|
Operating Expenses
|
29,000
|
|
Net operating income
|
25,000
|
|
Gain on sale of equipment
|
3,000
|
|
Income before taxes
|
28,000
|
|
Income taxes
|
13,000
|
|
Net income
|
$15,000
|
Required:
a. For each of the adjustments to convert net income to the cash basis, indicate whether the account increased or decreased.
b. Determine the net cash provided by operating activities using the direct method.
You need not prepare the formal operating activities section of the statement of cash flows but you should show the adjustments that must be made to sales, expenses, and so forth and the cash flow balances of sales, expenses, etc.