A company recorded the following activities in 2018: $5 million in capital expen

Question

A company recorded the following activities in 2018: $5 million in capital expenditures were made in 2018 $4 million in depreciation expense was recognized in 2018 $3 million in affiliate income recognized on the income statement from a 25% investment in an affiliate $1 million of insurance proceeds were received in cash due to hurricane damage on the company’s corporate headquarters Based only on the information provided, calculate the impact of the activities described above on the company’s 2018 operating income and cash flows (ignore taxes).

A. Operating income decreased by $1.0 million. Cash flows decreased by $4.0 million.

B. Operating income decreased by $5.0 million. Cash flows increased by $6.0 million.

C. Operating income decreased by $4.0 million. Cash flows decreased by $4.0 million.

D. Operating income decreased by $6.0 million. Cash flows decreased by $1.0 million.

E. Operating income decreased by $6.0 million. Cash flows decreased by $3.0 million.

Explanation / Answer

A. Operating income decreased by $1.0 million. Cash flows decreased by $4.0 million ,

decrease in Operating income = depreciation expense - affiliate income

= $4 million - $3 million

= $1 million

decrease in cash flow = $5 million  in capital expenditures - $1 million of insurance proceeds

= $4 million

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