The following information should be used according to the provisions of SFAS 95 (Statement of Cash flows) and using the following data.
Net Income $50,000 -
Provision for bad debts $2,000 -
Increase in Inventory $1,000 -
Increase in accounts payable $2,000
Purchase of new equipment $15,000
Sale of equipment for $10,000 gain $20,000
Depreciation expense $5,000 -
Repurchase of common stock $10,000
Payment of dividend $4,000 -
Interest payment $3,000 -
What is net cash flow from operations?
Click on the arrows to vote for the correct answer
A. B. C. D.B
$50,000 + $2,000 - $1,000 + $5,000 + $2,000 - $10,000
To determine the net cash flow from operations, we need to identify the cash inflows and outflows directly related to the company's core operations.
First, let's identify the items that are relevant to the cash flow from operations:
Net Income: This represents the profit earned by the company during the period and is a cash inflow.
Provision for bad debts: This represents an expense recognized for potential bad debts. Since it is an expense, it needs to be added back to the net income to reflect the cash flow.
Increase in Inventory: This represents an increase in the company's inventory levels. An increase in inventory requires the company to spend cash to acquire additional inventory. Therefore, it is considered a cash outflow and needs to be subtracted from the net income.
Increase in accounts payable: This represents an increase in the company's accounts payable, indicating that the company has received goods or services without making immediate payment. An increase in accounts payable is considered a source of cash, so it needs to be added back to the net income.
Depreciation expense: Depreciation is a non-cash expense that represents the allocation of the cost of long-term assets over their useful lives. Since it is a non-cash expense, it needs to be added back to the net income.
Repurchase of common stock: This represents the company's cash outflow for buying back its own shares. Since it is not related to the company's core operations, it should not be considered in the cash flow from operations.
Payment of dividend: This represents the cash outflow for distributing dividends to shareholders. Similar to the repurchase of common stock, it is not part of the company's core operations and should not be considered in the cash flow from operations.
Interest payment: This represents the cash outflow for paying interest on debt. Since interest payment is a financing activity, it is not part of the cash flow from operations.
Now, let's calculate the net cash flow from operations:
Net Cash Flow from Operations = Net Income + Provision for bad debts - Increase in Inventory + Increase in accounts payable + Depreciation expense
Net Cash Flow from Operations = $50,000 + $2,000 - $1,000 + $2,000 + $5,000
Net Cash Flow from Operations = $58,000
Therefore, the correct answer is:
D. $58,000