Question

Kunzen Company shows salaries expense of 15,000 in its income statement. During the current year, the balance of its salaries payable account increased by2,000. If the company uses the indirect method of presenting the operating activities section of the statement of cash flows, what is the change in salaries payable?

1) $2,000 increase
2) $2,000 decrease
3) $17,000 increase
4) $17,000 decrease

Answer 1

The change in salaries payable is a $2,000 increase, which is added back to net income in the indirect method cash flow statement. The actual cash paid for salaries is $13,000. The firm's accounting profit from the self-check question is $50,000.

Step-by-step explanation:

The change in salaries payable for Kunzen Company, using the indirect method of presenting the operating activities section of the statement of cash flows, is a $2,000 increase. When using the indirect method, increases in current liabilities are added to the net income to reconcile it to net cash provided by operating activities. Since the salaries expense was $15,000 and the salaries payable account increased by $2,000, it means that not all the salaries expense resulted in a cash outflow during the year. The actual cash paid for salaries was $13,000 ($15,000 in salary expenses minus the $2,000 increase in salaries payable). Therefore, in the cash flow statement, the increase in salaries payable is added back to the net income.

For the self-check question, to calculate the firm's accounting profit, we would deduct the total expenses (labor, capital, and materials) from the sales revenue. Therefore, the firm's accounting profit would be $50,000 ($1,000,000 - $600,000 - $150,000 - $200,000).