Below is an example of an incorrectly prepared statement of cash flows. The descriptions of activities are correct.
Cash from operating activities $60,000
Net Income (4,000)
Depreciation (2,000)
Increase in accounts receivable (1,000)
Increase in deferred tax liability $53,000
Cash from investing activities ($48,000)
Purchase of marketable securities 2,500
Dividends received 1,500 -
Dividends paid ($44,000)
Cash from financing activities (500)
Increase in Short-term debt (2,500)
Increase in Long-term debt ($3,000)
Increase in cash $6,000 -
The correct cash flows from operating activities is ________.
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A. B. C. D.A
60,000 + 4000(depreciation) - 2,000 (receivables) + 1,000 (deferred taxes) +2,500 (dividends received)
To determine the correct cash flows from operating activities, we need to adjust the given information in the incorrectly prepared statement of cash flows.
First, let's analyze the given information:
Cash from operating activities: $60,000 Net Income: ($4,000) Depreciation: ($2,000) Increase in accounts receivable: ($1,000) Increase in deferred tax liability: $53,000
Based on this information, we can start by calculating the correct net income. Net income is typically the starting point for preparing the statement of cash flows, and it is derived from the income statement. In this case, the given net income is shown as a negative value, which is unusual. Net income should be positive since it represents the profit of the company.
To correct this, we reverse the sign and find that the correct net income is $4,000.
Next, we consider the adjustments to net income to arrive at cash flows from operating activities. We add back non-cash expenses such as depreciation and make adjustments for changes in working capital accounts.
Adjustments: Depreciation: $2,000 (add back to net income) Increase in accounts receivable: $1,000 (subtract from net income) Increase in deferred tax liability: $53,000 (add back to net income)
Now, let's calculate the correct cash flows from operating activities:
Net Income: $4,000 Add: Depreciation: $2,000 Subtract: Increase in accounts receivable: ($1,000) Add: Increase in deferred tax liability: $53,000
Net Income + Depreciation - Increase in accounts receivable + Increase in deferred tax liability = Correct cash flows from operating activities
$4,000 + $2,000 - $1,000 + $53,000 = $58,000
Therefore, the correct cash flows from operating activities is $58,000.
None of the given answer choices (A, B, C) matches the correct answer.