Determining Net Cash Flow from Operating Activities An analysis of the balance sheet and income statement of Sanchez Company revealed the following: net income, $12,750; depreciation expense, $32,600; decrease in accounts receivable, $21,500; increase in inventory, $18,300; increase in accounts payable, $19,800; and decrease in interest payable of $1,200. Required:Compute the net cash flows from operating activities using the indirect method

Net Cash flows from operating activities is $67,150.

Explanation:

Operating cash flows are the cash flows from the operations of the business like sales, purchases, expenses etc.

Net income                                                    $12,750

Add: Depreciation expense                         $32,600

Add: Decrease in accounts receivable       $21,500

Less: Increase in inventory                          ($18,300)

Add: Increase in accounts payable             $19,800

Less: Decrease in interest payable             ($1,200)  

Net Cash flows from operating activities    $67,150

Non cash items is added back to net profit as it does not involve any cash transaction.

Decrease in receivable means there are more receipts from customer than sales made on credit.

Increase in inventory  means more inventory is purchased or manufactured than sold in the period. More inventory held the cost which need to be recovered from sale.

Increase in payable means there is less payment made to the suppliers and others than purchase made or expenses incurred during the period and vice versa for decrease in interest payable.

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