Interpreting Cash Flow from Operating Activities Carter Company’s income stateme

Question

Interpreting Cash Flow from Operating Activities
Carter Company’s income statement and cash flow from operating activities (indirect method) are provided as follows ($ thousands):

For each of the four statements below, determine whether the statement is true or false. If the statement is false, provide the (underlined) dollar amount that would make it true.

Income statement Revenue $400 Cost of goods sold 215 Gross profit 185 Operating expenses 110 Operating income 75 Interest expense 25 Income before taxes 50 Income tax expense 15 Net income $35

Explanation / Answer

Solution:

Amount to

True or False

make True

Reason

1. Carter collected $375 from customers in the current period.

Answer      True

$ 375

Cash received from customers

= Revenue – Increase in accounts receivable

= $ 400 - $ 25

=$ 375

2. Carter paid $0 interest in the current period.

Answer           FALSE

$ 25

Given in income statement

3. Carter paid $20 in income taxes in the current period.

Answer           FALSE

$ 15

Given in income statement

4. If Carter increased the depreciation expense by $50, it would increase its cash from operations by $50.

Answer           TRUE

Cash from operation

$ 145

Working Note 1

Working Note 1

Cash flow from operating activities

Net income

$35

Plus depreciation expense ($ 70 + $ 50)

120

Operating asset adjustments

Less increase in accounts receivable

(25)

Less increase in inventories

(50)

Less increase in prepaid rent

(5)

Plus increase in accounts payable

65

Plus increase in income tax payable

5

Cash flow from operating activities

$145

Increase in Cash flow from operating activities = $ 145- $ 95 = $ 50

Amount to

True or False

make True

Reason

1. Carter collected $375 from customers in the current period.

Answer      True

$ 375

Cash received from customers

= Revenue – Increase in accounts receivable

= $ 400 - $ 25

=$ 375

2. Carter paid $0 interest in the current period.

Answer           FALSE

$ 25

Given in income statement

3. Carter paid $20 in income taxes in the current period.

Answer           FALSE

$ 15

Given in income statement

4. If Carter increased the depreciation expense by $50, it would increase its cash from operations by $50.

Answer           TRUE

Cash from operation

$ 145

Working Note 1

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