Student Question
“Hi,
I have another question on cash flow from operations. I’m confused on how they arrived at their calculation of depreciation. I would have that depreciation would result in an inflow of $13,000 not $20,000. Or is it because they are also including the old equipment in the equation? I thought that the old equipment was already included in the accumulated depreciation. Thanks!”
– Brian
MCQ – Cash Inflow from Operating Activities
Madden Corporation’s controller has gathered the following information as a basis for preparing the Statement of Cash Flows. Net income for the current year was $82,000. During the year, old equipment with a cost of $60,000 and a net carrying value of $53,000 was sold for cash at a gain of $10,000. New equipment was purchased for $100,000. Shown below are selected closing balances for last year and the current year.
| Last Year | Current Year | |
| Cash | $39,000 | $85,000 |
| Accounts receivable net | 43,000 | 37,000 |
| Inventories | 93,000 | 105,000 |
| Equipment | 360,000 | 400,000 |
| Accumulated depreciation – equipment | 70,000 | 83,000 |
| Accounts payable | 22,000 | 19,000 |
| Notes payable | 100,000 | 100,000 |
| Common stock | 250,000 | 250,000 |
| Retained earnings | 93,000 | 175,000 |
Madden’s cash inflow from operating activities for the current year is:
A. $63,000
B. $73,000
C. $83,000 (Correct Answer)
D. $93,000
Correct answer: (C) Madden’s cash inflow from operating activities for the current year is $83,000.
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The depreciation expense will be computed as:
| Accumulated Depreciation | 70,000 | ||||
| Add: Depreciation Expense for the Period | xxx | ? | |||
| Less: Accumulated Depreciation of the Sold Asset | 7,000 | ($60,000 – $53,000) | |||
| Accumulated Depreciation, Ending | 83,000 | ||||
Squeezing out the formula, we will get depreciation expense for the period as:
| Accumulated Depreciation, Ending | 83,000 | |||
| Add: Accumulated Depeciaton of the Sold Asset | 7,000 | |||
| Less: Beginning Inventory | ||||
Note that the entry for the sale of the old equipment is as follows:
| DEBIT | CREDIT | ||||
| Cash | 63,000 | ||||
| Accumulated Depreciation | 7,000 | ||||
| Equipment | 60,000 | ||||
| Gain on Sale of Equipment | 10,000 | ||||
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Above is an example of a mini-lesson that helped my student, Brian, understand how to deduct cash inflow from operating activities.
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Until our next lesson,
2 Comments on “CMA Part 1: Cash Inflow & Outflow from Operating Activities”
Hi Nathan, the answer 83000 was actually refer to current year accumulated depreciation-equipment?
Hi Liew,
Yes. This link will explain further:https://cmaexamacademy.com/kb/cash-flows-from-operating-activities/