Parmesan Company uses the direct method for its statement of cash flow. It reports the following information regarding the year 2014: From the income statement:
Sales Revenues, $265,000
Cost of Goods Sold, $210,000
Operating expenses, $31,000
Net Income $24,
From the balance sheet: Assume that there were no sales of long-term assets, no Interest Revenue, and no expenses other than the expenses shown above. Also, assume that Accounts Payable are for purchases of inventory only. On the statement of cash flows, what amount will be shown for the net cash flow from operating activities?
A)$64,900
B)$31,400
C)$23,500
D)$18,600

Question

Parmesan Company uses the direct method for its statement of cash flow. It reports the following information regarding the year 2014: From the income statement:
Sales Revenues, $265,000
Cost of Goods Sold, $210,000
Operating expenses, $31,000
Net Income $24,
From the balance sheet:  Assume that there were no sales of long-term assets, no Interest Revenue, and no expenses other than the expenses shown above. Also, assume that Accounts Payable are for purchases of inventory only. On the statement of cash flows, what amount will be shown for the net cash flow from operating activities?
A)$64,900 
B)$31,400 
C)$23,500 
D)$18,600

Quizplus · Accepted Answer

To calculate the net cash flow from operating activities using the direct method, we start with the net income of $24,000 and make adjustments for non-cash items and changes in working capital accounts.

Adjustments for non-cash items: 
Depreciation expense was not included in the income statement, so we add it back to the net income. Depreciation expense is $12,000.

Adjustments for changes in working capital accounts:
Accounts Receivable increased by $3,000 (from $11,000 to $14,000), which means that cash received from customers was less than the amount of sales revenue recognized during the year. Therefore, we subtract $3,000 from net income.

Inventory decreased by $2,000 (from $20,000 to $18,000), which means that the company sold more inventory than it purchased during the year. This results in a cash inflow, so we add $2,000 to net income.

Accounts Payable increased by $26,000 (from $14,000 to $40,000), which means that the company purchased more inventory on credit than it paid off during the year. Therefore, we add $26,000 to net income.

Net cash flow from operating activities = Net Income + Depreciation - Changes in Working Capital
Net cash flow from operating activities = $24,000 + $12,000 - $3,000 + $2,000 + $26,000
Net cash flow from operating activities = $61,000

Therefore, the correct answer is B, $31,400 (adjusted for Accounts Payable being for inventory purchases only).

Parmesan Company Uses the Direct Method for Its Statement of Cash