Instructions: Prepare the cash flows from operating activities section of the statement of cash flows using the indirect method.

1. Why are an increase in accounts payable and a decrease in prepaid expenses both added to net income?

2. The net income reported on the income statement of Hunter, Inc. for the current year was $150,000. Depreciation recorded on the building and equipment amounted to $45,000 for the year. Balances of the current assets and current liability accounts at the beginning and end of the year are as follows:

End of year $42,875
Beginning of year $36,250

Accounts Receivables
End of year 147,500
Beginning of year 137,500

End of year 109,375
Beginning of year 93,750

Prepaid Expenses
End of year 9,250
Beginning of year 11,875

Accounts Payable
End of year 57,000
Beginning of year 40,000

Salaries Payable
End of year 7,625
Beginning of year 10,625