The following income statement was drawn from the income statement of Gibbons Company for its first year of operations: $$\begin{array} { l r }
\text { Cash revenue } & \$ 60,000 \
\text { Depreciation expense } & 20,000 \
\text { Accrued interest expense } & 6,000 \
\text { Cash operating expense } & 24,000 \
\text { Operating income } & 10,000 \
\text { Gain on the sale of equipment } & 1,200 \
\text { Net income } & \$ 11,200
\end{array}$$ Using the direct method,the net cash flow from operating activities equals:
A) $37,200.
B) $26,000.
C) $36,000.
D) $24,800.

Question

The following income statement was drawn from the income statement of Gibbons Company for its first year of operations: $$\begin{array} { l r } 
\text { Cash revenue } & \$ 60,000 \
\text { Depreciation expense } & 20,000 \
\text { Accrued interest expense } & 6,000 \
\text { Cash operating expense } & 24,000 \
\text { Operating income } & 10,000 \
\text { Gain on the sale of equipment } & 1,200 \
\text { Net income } & \$ 11,200
\end{array}$$ Using the direct method,the net cash flow from operating activities equals:
A) $37,200.
B) $26,000.
C) $36,000.
D) $24,800.

Quizplus · Accepted Answer

To calculate net cash flow from operating activities using the direct method, we need to adjust each item on the income statement that does not represent a cash inflow or outflow.

- Starting with net income of $36,000
- Add depreciation expense of $3,800 (because it is a non-cash expense)
- Subtract increase in accounts receivable of $1,600 (because this represents a reduction in cash flow)
- Add increase in accounts payable of $2,400 (because this represents an increase in cash flow)
- Subtract decrease in prepaid expenses of $400 (because this represents a reduction in cash flow)

Net cash flow from operating activities = $36,000 + $3,800 - $1,600 + $2,400 - $400 = $40,200 - $2,000 = $38,200

Therefore, the correct answer is C) $36,000.

The Following Income Statement Was Drawn from the Income Statement