Switch on each adjustment and walk net income down to cash from operating activities.
| Net income | $38,000 | |
| Add depreciation expense Depreciation reduced net income but used no cash — add it back. | +$24,000 | $62,000 |
| Add loss on sale of plant assets The loss was a bookkeeping write-down, not a cash outflow — add it back. | +$6,000 | $68,000 |
| Subtract gain on retirement of notes The gain inflated net income for a financing transaction — remove it here; the real cash shows up in financing. | −$16,000 | $52,000 |
| Subtract increase in accounts receivable Receivables rose — sales were recorded that have not come in as cash. | −$20,000 | $32,000 |
| Subtract increase in merchandise inventory More cash went into inventory than came out as cost of goods sold. | −$14,000 | $18,000 |
| Subtract increase in prepaid expenses Cash was paid out ahead of the expense being recorded. | −$2,000 | $16,000 |
| Subtract decrease in accounts payable Suppliers were paid down faster than new purchases were made on account. | −$5,000 | $11,000 |
| Subtract decrease in interest payable Interest owed was paid off, using cash beyond the expense recorded. | −$1,000 | $10,000 |
| Add increase in income taxes payable Taxes were expensed but not yet paid — the unpaid amount held cash back. | +$10,000 | $20,000 |
$20,000
$0
The starts from net income and corrects it: add back like depreciation, remove , then adjust for every .
This walk is a — it explains the gap between net income and operating cash flow, one line at a time.