Question

The Viviana Co. uses the indirect method to determine its cash flow from operations. Which of the following items will be subtracted from net income to find its cash flow from operations?

1) Depreciation expense
2) Interest expense
3) Increase in accounts receivable
4) Decrease in accounts payable

Answer 1

In the indirect method of cash flow calculation, an increase in accounts receivable is subtracted from net income because it does not represent actual cash received, despite being recorded as income. Depreciation and interest expenses, being non-cash charges, are added back, not subtracted. A decrease in accounts payable is also subtracted as it reflects payments made by the company.

Step-by-step explanation:

When using the indirect method to determine cash flow from operations, certain adjustments are made to the net income to account for changes in working capital and non-cash expenses. One of the items you will subtract from net income is an increase in accounts receivable. This adjustment is necessary because while an increase in accounts receivable is recorded as income, it does not result in an immediate cash inflow. However, you do not subtract depreciation expense or interest expense because they are non-cash charges that are added back to the net income in the cash flow statement. A decrease in accounts payable is also subtracted, as this indicates that the company has paid off some of its liabilities, which is a use of cash.