Changes in various accounts and gains and losses on the sale of assets during the year for Argon Company are given below: Item Amount Accounts receivable $ 90,000 decrease Inventory $ 120,000 increase Prepaid expenses $ 3,000 decrease Accounts payable $ 65,000 decrease Accrued liabilities $ 8,000 increase Income taxes payable $ 12,000 increase Sale of equipment $ 7,000 gain Sale of long-term investments $ 10,000 loss Required: For each item, indicate whether the dollar amount should be added to or deducted from net income under the indirect method when computing the net cash provided by operating activities for the year.

Accounts receivable $ 90,000 decrease - Added to net income

Inventory $ 120,000 increase - Deducted from net income

Prepaid expenses $ 3,000 decrease - Added to net income

Accounts payable $ 65,000 decrease - Deducted from net income

Accrued liabilities $ 8,000 increase - Added to net income

Income taxes payable $ 12,000 increase - Added to net income

Sale of equipment $ 7,000 gain - Deducted from net income

Sale of long-term investments $ 10,000 loss - Added to net income

Explanation:

The cash flow statement categories the company's transactions in a financial period into 3 groups; these are operating, investing and financing.

The net profit/loss, depreciation (and other non-cash items), changes in current assets (other than cash) and liabilities are considered as operating activities including income taxes.  

The sale of assets, interest received, purchase of investments are examples of investing activities while the issuance of stocks, debt principal deduction (loan settlement), issuance of debt securities etc are examples of financing activities.

Increase in assets other than cash is an outflow of cash,while an increase in liability is an inflow of cash.

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