Question

The following condensed income statement and reconciliation schedule are from the annual report of Alpha Biotech, Inc. (in millions):
Sales ............... $203
Expenses .............. 169
Net income ............. $ 34
Reconciliation Schedule of Net Income to
Net Cash Provided by Operating Activities
Net income ............... $ 34
Add noncash expenses
Depreciation ............... 17
Deduct net increase in noncash
operating working capital ......... (15)
Net cash provided by operating activities ... $ 36

A shareholder has suggested that the company switch from straight-line to accelerated depreciation on its annual report to shareholders. He maintains that this will increase the cash flow provided by operating activities. According to his calculations, using accelerated methods would increase depreciation to $27 million, an increase of $10 million; net cash flow from operating activities would then be $46 million.
1. Suppose Alpha Biotech adopts the accelerated depreciation method proposed. Compute net income and net cash flow from operating activities. Ignore income taxes.
2. Use your answer to number 1 to prepare a response to the shareholder.



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  • CreatedNovember 19, 2014
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