CFO - Indirect Method method, income, already, interest

jawz

I still don't get it. Please help. :-(

If you have the below info:
Net income was $850,000.
Depreciation expense was $200,000.
Interest paid was $100,000.
Income taxes paid were $50,000.

What's your CFO, using the indirect method?

The answer is $1,000,000 and the calculation is:
Cash flow from operations is ($850,000 + $200,000 – ($100,000 − $50,000)) = $1,000,000.

Why should we consider interest & income taxes here? Aren't they already factored in NI?

RobertA

Well well well ...interesting

While using the indirect method to calculate CFO, we need to include working capital changes.
Changes in income tax payable and interest payable come under working capital changes.

Since 50,000$ was paid in tax, taxes payable reduced by 50,000.
100,000$ was paid in interest, interest payable reduced by 100,000

Net income 850,000
Depreciation 200,000
Decrease in Interest payable (100,000)
Decrease in taxes payable (50,000)

Net cash 900,000

How did they get $1,000,000?

Wasteoftime

You know what, I just got a chance to re-read the question and I admit I didn't see the line about the sale of equipment!!! UGH!!!
Sorry for taking your time and thank you for it.

pacmandefense

Ok so that means that for the indirect method you shouldnt take the Interest paid and the taxes paid because they are already reflected in NI?

Jolyn

JCM Yes. They have already been factored into NI. You are adjusting CFO for non-cash expenses. (Amort, Depreciation etc)