Question

Lucia Ltd. reported net income of $135,200 for the year ended December 31, 2021. January 1 balances in accounts receivable and accounts payable were $28,400 and $27,000, respectively. Year-end balances in these accounts were $31,700 and $22,100, respectively. Assuming that all relevant information has been presented, Lucia's cash flows from operating activities would be:

Answer 1

Answer: Lucia's cash flows from operating activities would be as follows:

                                                                                              $

Net income                                                                      135,200

Increase in accounts receivable                                      (3,300)

Decrease in accounts payable                                        (4,900)

Cash flows from operating activities                           127,000

Explanation: In calculating cash flows from operating activities, all non-cash items like provisions, depreciation, gains / loss on disposals, etc are usually added back or deducted to / from the net income as the case may be, in order to adjust the net income from accrual accounting to cash basis. Literally, cash flows from operating activities are cash a business generates in the ordinary course of business. In this question, there is absence of non-cash items, only the movements in receivables and payable were presented.

Increase in accounts receivables means an outflow of cash; alternatively, decrease in accounts payable means settlement of obligations (cash outflows, as well). So, those would be deducted from the net income to arrive at cash flows from operating activities.