CMA Part 1: Cash Inflow & Outflow from Operating Activities

CMA Exam Questions - cash inflow and outflow from operating activities

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,
Nathan Liao Signature

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2 Comments on “CMA Part 1: Cash Inflow & Outflow from Operating Activities”

  1. Hi Nathan, the answer 83000 was actually refer to current year accumulated depreciation-equipment?

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