Question

Sanders Awnings reported net income of $84.5 million. Included in that number were depreciation expense of $1.8 million and a loss on the sale of equipment of $3.3 million. Records reveal increases in accounts receivable, accounts payable, and inventory of $2.8 million, $3.8 million, and $2.8 million, respectively. Required: What were Sanders’ cash flows from operating activities? Note: Cash outflows should be indicated with a minus sign. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).

Answer 1

To calculate the cash flows from operating activities, we need to add back non-cash expenses like depreciation expense and subtract any gains or add back losses from the sale of assets. We also consider changes in working capital items, such as accounts receivable, accounts payable, and inventory. By totaling these adjustments, we can determine the cash flows from operating activities.

Step-by-step explanation:

To calculate the cash flows from operating activities, we need to consider the adjustments to net income. First, we add back non-cash expenses like depreciation expense, which was $1.8 million. Then, we subtract any gains or add back losses from the sale of assets, in this case, a loss of $3.3 million. Next, we consider changes in working capital items. An increase in accounts receivable represents a use of cash, so we subtract the increase of $2.8 million. Similarly, an increase in accounts payable and inventory are sources of cash, so we add the increases of $3.8 million and $2.8 million, respectively. By totaling these adjustments, we can determine the cash flows from operating activities.

Depreciation expense: -$1.8 million

Loss on sale of equipment: +$3.3 million

Change in accounts receivable: -$2.8 million

Change in accounts payable: +$3.8 million

Change in inventory: +$2.8 million

Cash flows from operating activities: $84.5 million - $1.8 million - $3.3 million - $2.8 million + $3.8 million + $2.8 million = $82.4 million