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 securities2,500
Dividends received1,500 -
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 change in cash for the year is ________
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A. B. C. D.B
$60,000 + $4,000 - $2,000 + $1,000 - $48,000 + $2,500 - $1,500 + $500 + $2,500 = $19,000.
To determine the correct change in cash for the year, we need to analyze the statement of cash flows and identify any errors or inconsistencies.
Let's go through each section of the statement:
Cash from operating activities: $60,000 This represents the cash generated from the company's core operations.
Net Income: ($4,000) Net income is usually a positive value, but here it is shown as negative. This indicates a mistake in the calculation or representation of net income. Net income is an important component of the statement of cash flows as it affects the cash flow from operating activities.
Depreciation: ($2,000) Depreciation is a non-cash expense and should be added back to the net income when calculating cash flows from operating activities. However, here it is shown as negative, which is incorrect. It should be positive.
Increase in accounts receivable: ($1,000) An increase in accounts receivable represents cash that has not been received yet. This should be subtracted from cash from operating activities. The negative sign indicates the correct treatment of this item.
Increase in deferred tax liability: $53,000 An increase in deferred tax liability is a non-cash item and should be added back to the net income when calculating cash flows from operating activities. However, here it is shown as positive, which is incorrect. It should be negative.
Cash from investing activities: ($48,000) This section represents cash flows from the purchase or sale of long-term assets or investments. Here, it is shown as negative, which is correct as it represents an outflow of cash.
Purchase of marketable securities: $2,500 This item represents a cash outflow and is correctly shown as positive.
Dividends received: $1,500 Dividends received should be categorized under cash flows from operating activities, not investing activities. This is an error, and it should be included in the cash from operating activities instead of the cash from investing activities.
Dividends paid: ($44,000) Dividends paid represent a cash outflow and are correctly shown as negative.
Cash from financing activities: ($500) This section represents cash flows from borrowing or repaying debt, issuing or repurchasing stock, or paying dividends. Here, it is shown as negative, which is correct as it represents an outflow of cash.
Increase in short-term debt: ($2,500) An increase in short-term debt represents cash borrowed, and it should be shown as a positive value, not negative.
Increase in long-term debt: ($3,000) An increase in long-term debt also represents cash borrowed and should be shown as a positive value, not negative.
Increase in cash: $6,000 This item represents the change in cash from the beginning to the end of the period. It is correctly shown as positive.
Now, let's correct the errors and calculate the correct change in cash for the year:
Net Income: $4,000 (change sign from negative to positive) Depreciation: $2,000 (change sign from negative to positive) Increase in deferred tax liability: ($53,000) (change sign from positive to negative) Dividends received: ($1,500) (move to cash from operating activities) Increase in short-term debt: $2,500 (change sign from negative to positive) Increase in long-term debt: $3,000 (change sign from negative to positive)
Revised cash from operating activities: $60,000 (original) + $4,000 (net income) + $2,000