1. Gregson Company had the following noncash current asset and current liabilities balances at the
end of 2010 and 2011:
2010
2011
Accounts receivable
$ 60,000
$ 68,000
Inventory
230,000
210,000
Prepaid insurance
15,000
13,000
Accounts payable
20,000
30,000
Net income for 2011 was $750,000 and depreciation expense was $40,000. All sales and all
purchases are on account. Gregson uses the indirect method for preparing the statement of cash
flows.
Net cash flows from operating activities for 2011 would be:
2010 2011
Accounts receivable $ 60,000 $ 68,000
Inventory 230,000 210,000
Prepaid insurance 15,000 13,000
Accounts payable 20,000 30,000

2. Solution
For indirect method,
All non cash expenses should be added to net income
Decrease in current assets other than cash should be added back to net income
Increase in current assets other than cash should be subtracted from net income
Decrease in current liablities other than cash should be subtracted from to net income
Increase in current liablities other than cash should be added to net income
Cash flow from operating activities:
Net Income = 750,000
Add:
Depreciation expense = 40,000
Decrease in Accounts receivables = -8000
Increase in accounts payable = 10,000
Decrease in Prepaid Insurance = 2000
Net Cash flow from operating activities = 750000 + 40000 +10000 +2000 -8000 = $794,000