Great Adventure Travel Company had the following adjustments to net income when computing its cash flow from operations for the year just ended.
|
Net income |
$326,000 |
|
|
Add: Adjustments |
||
|
(1) Depreciation |
$13,000 |
|
|
(2) Decrease in accounts receivable |
2,000 |
|
|
(3) Increase in inventory |
4,500 |
|
|
(4) Decrease in accounts payable |
3,000 |
7,500 |
|
Cash flow from operations |
$333,500 |
a. Explain why it is generally necessary to make additions to and subtractions from net income when computing cash flow from operations in the indirect format.
b. For each adjustment (labeled 1 through 4), explain why that specific adjustment was necessary to determine cash flow from operations.