Dear Members,
Pls have a look on the below question and feed back, Can any body explain why increase in current liabilities $70K not taken in to account as a cash inflow for operating activities.
The Smalltown Technology Corporation has prepared the following information.
| Comparitive balance sheet ($000 omitted) |
| Current Year | Prior year | Current Year | Prior year |
| Cash | 300 | 400 | Accounts payable | 1000 | 900 |
| Accounts receivable | 1200 | 1000 | Accrued Liabilities | 150 | 180 |
| Inventory | 1000 | 800 | Current Laibilities | 1150 | 1080 |
| Current Assets | 2500 | 2200 | Long term Liabilites | 1200 | 900 |
| Plant and Equip | 6250 | 4300 | Common stock | 100 | 100 |
| Accumulated Depreciation | -2050 | -900 | Additional paid in capital | 2900 | 2900 |
| Net plant and Equip | 4200 | 3400 | Retained earnings | 1350 | 620 |
| Total Assets | 6700 | 5600 | Debt and Equity | 6700 | 5600 |
| Income statement ($000 omitted) |
| Current Year | Prior year |
| Revenue | 12800 | 8350 |
| Cost of goods sold | 9856 | 6263 |
| Gross profit | 2944 | 2087 |
| selling and admin exp | 577 | 154 |
| Depreciation | 1150 | 900 |
| Pre tax income | 1217 | 1033 |
| Income Tax | 487 | 413 |
| Net Income | 730 | 620 |
Calculate the cash flow from operating activities in Current Year.Calculate the cash flow from operating activities in Current Year.Calculate the cash flow from operating activities in Current Year.
|
| $1,880 |
|
| $1,190 |
|
| $1,250 |
|
| $1,550 |
The correct answer is: $1,550.
Cash flow from operations can be determined by the indirect method (the reconciliation of net income to cash flow from operations). Cash flow from operations using the indirect method is calculated as follows:
Cash flow from operations (indirect method) =
net income
+ non-cash debits in income statement
- non-cash credits in income statement
+ increases in current liabilities (except dividends payable)
+ decreases in current assets (except cash and cash equivalents)
- decreases in current liabilities (except dividends payable)
- increases in current assets (except cash and cash equivalents)
Therefore, Smalltown's cash flow from operations can be calculated as:
Cash flow from operations (indirect method) =
$730 net income
+ $1,150 depreciation
+ $100 increase in accounts payable
- $30 decrease in accrued liabilities
- $200 increase in accounts receivable
- $200 increase in inventory = $1,550
-------------------------------------------
Israr Ahmed
Assistant Manager-Accounts
Dayim Holdings Ltd
Riyadh
Saudi Arabia
-------------------------------------------