Question

The arcadia company owns no plant assets and had the following income statement for the year:

sales revenue $950,000
cost of goods sold $670,000
wages expense 210,000
rent expense 42,000
utilities expense 15,000 937,000
net income $13,000

additional information about the company includes:
end of year beginning of year
accounts receivable $64,000 $59,000
inventory 60,000 86,000
prepaid rent 8,000 7,000
accounts payable 22,000 28,000
wages payable 9,000 6,000

use the preceding information to calculate the cash flow from operating activities using the indirect method.

Answer 1

The cash flow from operating activities for the Arcadia company, calculated using the indirect method, would be $30,000 after adjusting the net income for changes in working capital accounts. $30,000 cash flow from operating activities.

Step-by-step explanation:

Calculating Cash Flow from Operating Activities (Indirect Method)

To calculate the cash flow from operating activities using the indirect method for the Arcadia company, we start with the net income and adjust for changes in working capital accounts and non-cash expenses. Here's the breakdown:

1. Net Income: Start with the net income of $13,000.
2. Add back non-cash expenses. In this case, there are no depreciation or amortization expenses since the company owns no plant assets.
3. Adjust for changes in working capital:
4. Accounts Receivable increased by $5,000 (from $59,000 to $64,000), which is a use of cash, so it is subtracted.
5. Inventory decreased by $26,000 (from $86,000 to $60,000), which is a source of cash, so it is added.
6. Prepaid Rent increased by $1,000 (from $7,000 to $8,000), which is a use of cash, so it is subtracted.
7. Accounts Payable decreased by $6,000 (from $28,000 to $22,000), which is a use of cash, so it is subtracted.
8. Wages Payable increased by $3,000 (from $6,000 to $9,000), which is a source of cash, so it is added.
9. After all adjustments, you would sum up the amounts to calculate the total cash flow from operating activities.

By applying the indirect method, the calculation would be: $13,000 (net income) - $5,000 (increase in accounts receivable) + $26,000 (decrease in inventory) - $1,000 (increase in prepaid rent) - $6,000 (decrease in accounts payable) + $3,000 (increase in wages payable) = $30,000 cash flow from operating activities.