Question

48. In calculating net cash provided by operating activities using the indirect method, an increase in prepaid expenses during a period is: a) deducted from profit. b) added to profit. c) ignored because it does not affect profit. d) ignored because it does not affect expenses. 49. Which of the following adjustments to convert profit to net cash provided by operating activities is correct? Add to Profit Deduct from Profit a) Accounts Receivable b) Prepaid Expenses c) Inventory d) Income Taxes Payable increase increase decrease decrease decrease decrease increase increase 50. Summary financial information for Klinger Corporation for the year ended July 1, 2021 is listed below: Profit Depreciation expense Beginning inventory Ending inventory Cost of goods sold Interest expense Income tax expense Operating profit Cash provided by operating activities Dividends paid Cash used by investing activities $ 300,000 34,000 100,000 70,000 50,000 135,000 77,000 450,000 350,000 50,000 122,000 Klinger's free cash flow for 2021 is: a) $ 128,000. b) $ 228,000. c) $ 178,000 d) $ 546,000.

Answer 1

1) Answer) a) Deducted from Profit

Income statement deducts expenses incurred for the year, therefore expenses prepaid should be deducted from profit.

2) Answer) c) Inventory : decrease - Add to Profit, increase - Deduct from Profit

Increase in current assets should be deducted from profit, decrease in current assets should be added to profit. Increase in current liabilities should be added to profit , decrease in current liabilities should be deducted from profit. Therefore the other options are wrong.

3) Answer) c) $178000

Free cash fow = Cash provided by operating activities - Capital expenditures

= 350000 - 122000 - 50000