Accounts receivable arising from sales to customers amounted to $35,000 and $40,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $223,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is
A)$223,000.
B)$228,000.
C)$258,000.
D)$218,000.

Question

Quizplus · Accepted Answer

The increase in accounts receivable indicates that sales were made on credit during the year, resulting in an outflow of cash (since the company did not receive the money from the customers yet). Therefore, the income reported on the income statement needs to be adjusted for the increase in accounts receivable.

The cash flows from operating activities can be calculated using the indirect method as follows:

Net income: $223,000
Add: Increase in accounts receivable: $40,000 - $35,000 = $5,000
Cash flows from operating activities: $223,000 + $5,000 = $228,000

Therefore, the correct answer is D) $218,000.

Accounts Receivable Arising from Sales to Customers Amounted to $35,000