Question 7

Question

A company put together a preliminary version of its financial statements. Its Net Income was $200, its Depreciation Expense was $40, and its Cash Flow from Operations was $90. The accountant found an error in computing straight-line Depreciation Expense. It should have been $50. What is Cash from Operations after fixing this mistake? (you can ignore taxes)

$80

$250

$100

$90

$0

1 point
8.
Question 8
A co

Answer 1

To calculate Cash Flow from Operations after correcting the error in Depreciation Expense, we need to understand how Depreciation Expense affects Net Income and Cash Flow from Operations.

1. Original Depreciation Expense: $40
2. Corrected Depreciation Expense: $50
3. Change in Depreciation Expense: $50 - $40 = $10 increase

When Depreciation Expense increases, Net Income decreases because it is an expense. However, since Depreciation is a non-cash expense, we add it back while calculating Cash Flow from Operations.

4. Original Net Income: $200
5. Adjusted Net Income: $200 - $10 (increase in Depreciation Expense) = $190

Now, we will recalibrate the Cash Flow from Operations with the adjusted Depreciation:

6. Original Cash Flow from Operations: $90

7. Adjustment for Depreciation: Since we had been adding back the original $40 Depreciation but need to add back the corrected $50, we are asserting that there's a $10 additional cover for cash:

   New Cash Flow from Operations = Original Cash Flow from Operations + (Corrected Depreciation - Original Depreciation)
   New Cash Flow from Operations = $90 + ($50 - $40)
   New Cash Flow from Operations = $90 + $10
   New Cash Flow from Operations = $100

Therefore, after correcting the Depreciation Expense, Cash Flow from Operations will be $100.

So the answer is $100.