In 2012, Eastman Sound Co. had net income of $–70,000. If accruals decreased by

Question

In 2012, Eastman Sound Co. had net income of $–70,000. If accruals decreased by $45,000, receivables and inventories rose by $50,000, and depreciation was $10,000, what was the firm’s cash flow from operating activities?

In 2012, Eastman Sound Co. had net income of $–70,000. If accruals decreased by $45,000, receivables and inventories rose by $50,000, and depreciation was $10,000, what was the firm’s cash flow from operating activities?

Explanation / Answer

Cash Flow from operating activities = Net Income + Non cash expenses (Including depreciation) + Changes in working capital ( - Increase in Current assets + decrease in current assets + Increase in current liabilities - decrease in current Liabilities)

= - $70,000 + $10,000 + (-$45,000 - $50,000)

= - $ 1,55,000

changes in working capital = - Increase in Current assets + decrease in current assets + Increase in current liabilities - decrease in current Liabilities

Increase in current assets would lead to cash been invested in the assets hence would decrease the cash flow.

Decrease in current liabilities would lead to cash been paid out or taken out of the business system and hence would lead to decrease in cash flow.

Decrease in current assets would release the cash in the business system and hence cash inflow.

Increase in current liabilities would lead to less cash being paid towards settling the liabilities and hence would lead to cash inflow in the business system.

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