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):

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

Cash flow from operating activities
Net income	$35
Plus depreciation expense	70
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	$95

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.

		Amount to
	True or False	make True
1. Carter collected $375 from customers in the current period.		$
2. Carter paid $0 interest in the current period.
3. Carter paid $20 in income taxes in the current period.
4. If Carter increased the depreciation expense by $50, it would increase its cash from operations by $50.

Answer 1

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