Question

Firm net income in 2022 was $100 million and depreciation was $20 million. Further, relative to 2021, accounts receivables increased by $25 million, inventory decreasd by $12 million, accounts payables decreased by $40 million and accruals increased by $18 million. What is the cash flow from operating activities in 2022?.

a.$141 million
b.$111 milion
c.$85 million
d.$71 million

Answer 1

The cash flow from operating activities in 2022 is calculated by adjusting the net income by the changes in working capital and adding back non-cash charges. After accounting for the increases and decreases in accounts receivable, inventory, accounts payable, and accruals, the correct calculation leads to an operating cash flow of $85 million.

Step-by-step explanation:

To calculate the cash flow from operating activities for the firm in 2022, we need to adjust the net income by changes in working capital and add back non-cash charges such as depreciation. The formula is:

Operating Cash Flow = Net Income + Depreciation + Increases in Working Capital Liabilities - Increases in Working Capital Assets.

Based on the provided figures:

• Net Income = $100 million
• Depreciation = $20 million
• Increase in Accounts Receivable = -$25 million (negative because this is a use of cash)
• Decrease in Inventory = +$12 million (positive because this is a source of cash)
• Decrease in Accounts Payable = -$40 million (negative because this is a use of cash)
• Increase in Accruals = +$18 million (positive because this is a source of cash)

So, the Operating Cash Flow for 2022 is calculated as follows:

Operating Cash Flow = $100 million + $20 million - $25 million + $12 million - $40 million + $18 million

Operating Cash Flow = $85 million

Therefore, the cash flow from operating activities in 2022 is $85 million, which makes option (c) the correct answer.