How to Calculate Cash Flows from Operating Activities

What would be equal to the amount of cash flows from operating activities?

A. $19,000
B. $49,000
C. $81,000
D. $80,000
E. $100,000

Answer:

The cash flows from operating activities is $80,000 which can be computed by adding the net profit and depreciation, while excluding any financing activities like borrowing money from the bank. Correct option is D.

The cash flows from operating activities can be calculated using the indirect method, which starts with net profit and adjusts for non-cash expenses and changes in working capital. To calculate the cash flows from operating activities, we need to consider the following factors:

Start with the net profit reported on the income statement, which is $50,000 in this case. Add back the depreciation on property, plant, and equipment, which is $30,000. Depreciation is a non-cash expense, so we need to remove it from the net profit. Since the company borrowed $100,000 from the bank, this is considered a financing activity and not included in the cash flows from operating activities.

Therefore, the amount of cash flows from operating activities would be equal to the net profit plus depreciation, which is $50,000 + $30,000 = $80,000.

So, the correct option is D. $80,000. In summary, to calculate the cash flows from operating activities, we add the net profit and depreciation, while excluding any financing activities like borrowing money from the bank.