Suppose Ruston Company has the following results related to cash flows for 2022:
Net Income of $6,700,000
Increase in Accounts Payable of $300,000
Decrease in Accounts Receivable of $500,000
Increase in Inventory of $800,000
Assuming no other cash flow adjustments than those listed above, create a statement of cash flows with amounts in thousands.
What is the Net Cash Flow from Operating Activities?
Solution ✅
- The calculation step-by-step for the Operating Activities section of the statement of cash flows for Ruston Company for the year 2022:
| Particular | Amount $ (Thousands) |
| Cash flows from operating activities: | |
| Net Income | $6,700.00 |
| Adjustments to reconcile net income to cash flow from operating activities: | |
| + Increase in Accounts Payable | $300.00 |
| + Decrease in Accounts Receivable | $500.00 |
| – Increase in Inventory | $-800.00 |
| Net Cash Flow from Operating Activities | $6,700.00 |
2. Adjustments for Non-Cash Items:
- Decrease in Accounts Receivable:
- A decrease in accounts receivable means the company collected less than the sales it recognized in the income statement, leading to an increase in cash.
- The decrease in accounts receivable of $500,000 means cash increased by this amount.
- So, we add back this decrease to the net income: +$500.
- Increase in Inventory:
- An increase in inventory means the company spent cash to purchase additional inventory but did not recognize the full expense in the income statement since it’s recorded as an asset.
- The increase in inventory of $800,000 represents cash outflow for inventory purchases.
- Thus, we subtract this increase in inventory to adjust for the non-cash impact on net income: -$800.
- Increase in Accounts Payable:
- An increase in accounts payable indicates that the company purchased goods or services on credit and didn’t pay cash for them during the period.
- The increase in accounts payable of $300,000 means the company has an additional liability, which is essentially a source of cash.
- Therefore, we add back this increase to the net income: +$300.
Summary
Net Cash Provided by Operating Activities for Ruston Company in 2022 is $6,700 (Thousands), considering adjustments for accounts receivable, inventory, and accounts payable.
