Accounts receivable arising from sales to customers amounted to $40000 and $55000 at the beginning and end of the year respectively. Income reported on the income statement for the year was $180000. Exclusive of the effect of other adjustments the cash flows from operating activities to be reported on the statement of cash flows is
A) $180000.
B) $195000.
C) $220000.
D) $165000.

Question

Quizplus · Accepted Answer

The operating activities section of the statement of cash flows begins with net income and makes adjustments for non-cash expenses (such as depreciation) and changes in current assets and liabilities. In this case, the increase in accounts receivable from $40,000 to $55,000 means that cash collections from customers were less than the amount of sales revenue recognized on the income statement. This represents a use of cash, and must be subtracted from net income to arrive at the cash flows from operating activities. Therefore:

Cash flows from operating activities = $180,000 (net income) - ($55,000 - $40,000) = $180,000 - $15,000 = $165,000

Therefore, the correct option is D) $165000.

Accounts Receivable Arising from Sales to Customers Amounted to $40000