Refer to the following summarized income statement and additional selected information for

Huanca , Inc.:

Income Statement

Revenues                                             $146,500

Cost of sales                                       55,500

Gross margin                                        91,000

Salary expense                                     56,835

Depreciation and amortization             33,305

Other expense                                                  7,781

Net loss before tax                               (6,921)

Income tax expense                             2,561

Net loss                                                $ (9,482)

Other information:

Decrease in receivables                        $ 170

Decrease in inventories                        643

Increase in prepaid expenses                664

Increase in accounts payable                2,282

Decrease in accrued liabilities              719

Increase in income taxes payable         1,861

Required:

1. Based on this information, compute cash flow from operating activities using the direct method. Assume that prepaid expenses and accrued liabilities relate to other expense.

2. What were the major reasons that Huanca’s was able to report a net loss but positive cash flow from operations? Why are the reasons for the difference between cash flows from operations and net income important to financial analysts?