Hamlet Ltd. adheres to ASPE. On Hamlet Ltd.'s statement of cash flows (indirect method) for calendar 2020, cash flows from operating activities were reported at $ 154,000. The statement included the following items: depreciation on plant assets of $ 60,000; impairment of goodwill of $ 10,000; and cash dividends paid of $ 72,000. Based only on the information given above, Hamlet's net income for 2020 was
A) $ 12,000.
B) $ 84,000.
C) $ 154,000.
D) $ 214,000.

Question

Quizplus · Accepted Answer

The net income cannot be directly calculated from the information given. However, we know that cash flows from operating activities were $154,000, which includes adjustments for non-cash expenses such as depreciation on plant assets of $60,000 and impairment of goodwill of $10,000. These expenses are subtracted from net income to arrive at cash flows from operating activities. Therefore, to find net income, we need to add back these non-cash expenses to the cash flows from operating activities.
 
$154,000 (cash flows from operating activities) + $60,000 (depreciation expense) + $10,000 (impairment expense) = $224,000
 
Next, we need to adjust for cash dividends paid of $72,000 which is a financing activity, not an operating activity. Therefore, we subtract it from the calculated amount above to get the net income for 2020.
 
$224,000 - $72,000 = $152,000
 
Therefore, the net income for 2020 was $84,000 (choice B).