Question

Three different companies each purchased trucks on January 1, Year 1, for $50,000. Each truck was expected to last four years or 200,000 miles. Salvage value was estimated to be $5,000. All three trucks were driven 66,000 miles in Year 1. 42,000 miles in Year 2,40,000 miles in Year 3, and 60,000 miles in Year 4. Each of the three companies earned $40,000 of cash revenue during each of the four years. Company A uses straight-line depreciation, company B uses double- declining-balance depreciation, and company C uses units-of-production depreciation. Answer each of the following questions. Ignore the effects of income taxes. e. Which company will report the lowest amount of cash flow from operating activities on the Year 3 statement of cash flows? if income tax is not considered The cash flow from operating activities will be Depreciation expense for a cash flow item.

That's the complete question. E.

Answer 1

while calculating cash flow from operating activities, only cash revenue is considered i.e. the depreciation expense dosen't effect the cash flow from operating activities because it is a non cash expense.

To futher elaborate, the cash flow from operating activities is calculated by 2 methods.

The first is direct method, which directly uses cash revenues to calculate the cash flow from operating activities.

The second is indirect method, which uses net income and then non cash items such as depreciation is added to get cash flow from operating activities.

So, ultimately we use only cash revenues in both the methods to calculate cash flow from operating activities.

So, the answer shall be as follows -

e) the cash flow from operating activities will be same for all the 3 companies if income tax is not considered.

Depreciation expense is not a cash flow item.

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