Question

Three different companies each purchased trucks on January 1, 2018, for $74,000. Each truck was expected to last four years or 250,000 miles. Salvage value was estimated to be $5,000. All three trucks were driven 80,000 miles in 2018, 60,000 miles in 2019, 45,000 miles in 2020, and 70,000 miles in 2021. Each of the three companies earned $63,000 of cash revenue during each of the four years. Company A uses straight-line depreciation, company B uses double-declining-balance depreciation, and company C uses units-of-production depreciation.

Answer each of the following questions. Ignore the effects of income taxes.

5. Which company will report the lowest amount of cash flow from operating activities on the 2020 statement of cash flows?

Answer 1

Depreciation for Company A under Straight-line method = (Cost - Salvage value) / Estimated useful life

Depreciation for the year 2020 = ($74,000 - $5,000) / 4

= $17,250

Depreciation for Company B under Double declining balance method = (Cost - Accumulated depreciation) / Useful life * 2

Depreciation for the year 2018 = ($74,000 - $0) / 4 * 2

= $37,000

Depreciation for the year 2019 = ($74,000 - $37,000) / 4 * 2

= $18,500

Depreciation for the year 2020 = ($74,000 - $37,000 - $18,500) / 4 * 2

= $9,250

Depreciation for Company C under the Units of production method = (Cost - Salvage value) * Miles driven in the year / Total miles driven

Depreciation for the year 2020 = ($74,000 - $5,000) * 45,000 / (80,000+60,000+45,000+70,000)

= $12,176

Depreciation is added back to Net income under the Operating activities of the Statement of cash flows

As the Depreciation is added back and the Company C has lower amount of Depreciation for the year 2020, Company C will report the lowest amount of cash flow from operating activities on the 2020 statement of cash flows.