Question

Cash Flow from Operating Activities (Indirect Method)

The Arcadia Company owns no plant assets and had the following income statement for the year:
Sales revenue $1,710,000
Cost of goods sold $1,206,000
Wages expense 378,000
Rent expense 75,600
Utilities expense 27,000 1,686,600
Net income $23,400

Additional information about the company includes:
End of Year Beginning of Year
Accounts receivable $115,200 $106,200
Inventory 108,000 154,800
Prepaid rent 14,400 12,600
Accounts payable 39,600 50,400
Wages payable 16,200 10,800

Use the preceding information to calculate the cash flow from operating activities using the indirect method. Remember to use negative signs with your answers when appropriate.

Answer 1

To calculate cash flow from operating activities using the indirect method, start with net income and adjust for changes in working capital. After adjustments, the cash flow from operating activities for Arcadia Company is $54,000.

Step-by-step explanation:

The student is asking how to calculate cash flow from operating activities using the indirect method based on data provided for Arcadia Company.

Steps to Calculate Cash Flow from Operating Activities:

1. Start with the net income of $23,400.
2. Add back non-cash expenses: Since there are no non-cash expenses like depreciation mentioned, we skip this step.
3. Adjust for changes in working capital:
4. Decrease in accounts receivable: add $106,200 - $115,200 = (-$9,000)
5. Decrease in inventory: add $154,800 - $108,000 = $46,800
6. Decrease in prepaid rent: subtract $14,400 - $12,600 = $1,800
7. Decrease in accounts payable: subtract $50,400 - $39,600 = $10,800
8. Decrease in wages payable: add $16,200 - $10,800 = $5,400
9. The total adjustments for working capital changes: -$9,000 + $46,800 - $1,800 - $10,800 + $5,400 = $30,600.
10. Add the total adjustments to the net income: $23,400 +$30,600 = $54,000.

The cash flow from operating activities is $54,000 using the indirect method.