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23 January, 06:23

Alpha Computers reports net income of $44 million. Included in that number are depreciation expense of $7 million and a loss on the sale of land of $1 million. Records reveal decreases in Accounts Receivable, Inventory, and Accounts Payable of $6 million, $3 million, and $1 million, respectively. Calculate Alpha Computers' net cash flows from operating activities using the indirect method. (Enter your answer in millions. Omit the "$" sign in your response.) Net cash flows from operating activities $

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  1. 23 January, 06:49
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    Alpha Computers' net cash flow from operating activities (using indirect method) is 60 million.

    Operating Activites will be made up of;

    Net income 44 million

    Add Depreciation 7 million

    Add loss on the sale of land 1 million

    Movement in working capital;

    Add Decrease in account receivable 6 million

    Add Decrease in inventory 3 million

    Less Decrease in account payable 1 million

    Net cash form operating activities 60 million.

    Explanation:

    Note that using indirect method;

    Add back non-cash movement items like (depreciation, amortisation, impairment and reveluations) - Depreciation 7 million (the reason is because these items do not involve any cash transaction. in the cause of this transaction no payment was made or received.)

    Less/add losses or profit from disposal of assets. (reason is because these are treated under investment activities. Losses on asset disposed are added back since they were deducted in arriving at the net income)

    Movement in working capital is made up of current asset and liabilities items like receivables, inventory and payables. Decrease in receivables and inventory often imply increase in cash inflow since most debtor have paid to reduce their outstanding liabilities and the organisation must have sold its inventory for cash. However decrease in payable indicated cash outflow. Since outstanding liabilities of the organisation are paid to reduce account payable.
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