ABC Company is preparing its Statement of Cash Flows using the direct method. The accountant gathered the following information:cash paid to suppliers was \$140,000; sales revenue was \$350,000; Accounts Receivable increased by \$10,000 during the year; depreciation expense was \$15,000; operating expenses totaled \$80,000; Prepaid Expenses decreased by \$8,000 during the year; and a loss on the disposal of plant assets equaled \$6,000. What is the cash flow provided by operating activities?

• A. \$128,000
• B. \$138,000
• C. \$144,000
• D. \$149,000

Answer: (A)

Verified step by step guidance

1. Start by identifying the cash inflows from operating activities. In this case, the primary cash inflow is from sales revenue, which is \$350,000.
2. Adjust the sales revenue for changes in Accounts Receivable. Since Accounts Receivable increased by \$10,000, it means that not all sales were collected in cash. Therefore, subtract \$10,000 from the sales revenue.
3. Consider the cash outflows related to operating activities. Cash paid to suppliers is \$140,000, which is a direct cash outflow.
4. Adjust for changes in Prepaid Expenses. A decrease in Prepaid Expenses by \$8,000 indicates that this amount was expensed during the year, reducing the cash outflow. Therefore, add \$8,000 to the cash flow.
5. Operating expenses are given as \$80,000. Since depreciation expense and loss on disposal of plant assets are non-cash items, they do not affect the cash flow directly. Therefore, exclude these from the cash flow calculation.