To adjust the net income for changes in operating assets and liabilities, we need to consider how the changes in accounts receivable, inventory, and accounts payable affect cash flows from operating activities.
Here’s a breakdown of the adjustments:
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Accounts Receivable (A/R): Increased from $17,800 to $18,000, which represents an increase of $200.
- Effect on Cash Flows: An increase in A/R is a use of cash because it means that more sales were made on credit and not yet received in cash.
- Adjustment: Deduct $200 from net income.
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Inventory: Decreased from $79,400 to $78,700, representing a decrease of $700.
- Effect on Cash Flows: A decrease in inventory is a source of cash because it indicates that goods were sold, and less cash is tied up in unsold inventory.
- Adjustment: Add $700 to net income.
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Accounts Payable (A/P): Increased from $29,800 to $30,600, which represents an increase of $800.
- Effect on Cash Flows: An increase in A/P is a source of cash because it means that the company has delayed payments to suppliers, allowing it to conserve cash.
- Adjustment: Add $800 to net income.
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Dividends Payable: While it changed, dividends payable is not considered an operating liability in this context, so we will not adjust for this.
Now, let's summarize the adjustments:
- Starting net income: $94,600
- Adjustments:
- Decrease due to increase in A/R: -$200
- Increase due to decrease in Inventory: +$700
- Increase due to increase in A/P: +$800
Total Adjustments:
\[ Net Cash Flows from Operating Activities = Net Income + Adjustments \] \[ Net Cash Flows from Operating Activities = 94,600 - 200 + 700 + 800 \] \[ Net Cash Flows from Operating Activities = 94,600 + 1300 \] \[ Net Cash Flows from Operating Activities = 95,900 \]
Thus, the net cash flows from operating activities would be $95,900.
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