Innovative Products reported net income of $205,000.Beginning and ending Inventory balances were $40,000 and $45,000,respectively.Accounts Payable balances at the beginning and end of the year were $35,000 and $33,000,respectively.Assuming that all relevant information has been presented,the company would report operating cash flows of:
A)$202,000.
B)$198,000.
C)$212,000.
D)$205,000.

Question

Quizplus · Accepted Answer

To calculate operating cash flows, we use the indirect method. Starting with net income ($205,000), we add back non-cash expenses such as depreciation/amortization and adjust for changes in working capital (inventory and accounts payable).

Net Income = $205,000
Depreciation/Amortization = ?
Changes in Inventory = Ending Inventory - Beginning Inventory = $45,000 - $40,000 = $5,000 (since inventory increased, we need to subtract this amount)
Changes in Accounts Payable = Beginning Accounts Payable - Ending Accounts Payable = $35,000 - $33,000 = $2,000 (since accounts payable decreased, we need to add this amount)

Operating Cash Flows = Net Income + Depreciation/Amortization + Changes in Working Capital
Operating Cash Flows = $205,000 + Depreciation/Amortization - $5,000 + $2,000

We do not have information about the amount of depreciation/amortization, so we cannot calculate the exact operating cash flows. However, we can eliminate answer choices A, C, and D since they do not match any possible values for operating cash flows given the information provided. The closest option is B, which is the best choice.

Innovative Products Reported Net Income of $205,000