Question

Which of the following should be added to net income in computing net cash flows from operating activities using the indirect method?

a.preferred dividends declared and paid
b.a decrease in accounts receivable
c.an increase in inventory
d.a decrease in accounts payable

Answer 1

When using the indirect method to compute net cash flows from operating activities, a decrease in accounts receivable should be added to net income, indicating that more cash has been collected, resulting in a cash inflow.

Step-by-step explanation:

In computing net cash flows from operating activities using the indirect method, a decrease in accounts receivable should be added to net income. This is because when accounts receivable decrease, it indicates that more cash has been collected from customers than the amount of sales recorded on an accrual basis; hence, it represents an inflow of cash that was not initially recorded as part of net income. The indirect method starts with the net income and adjusts for changes in balance sheet items that affect cash but were not part of the net income calculation.

When computing net cash flows from operating activities using the indirect method, there are certain items that should be added to net income. These include preferred dividends declared and paid, as well as a decrease in accounts receivable. An increase in inventory and a decrease in accounts payable, on the other hand, should be deducted from net income.

Answer 2

Preferred dividends declared and paid, a decrease in accounts receivable, and an increase in inventory should be added to net income when computing net cash flows from operating activities using the indirect method. A decrease in accounts payable should be subtracted from net income.

Step-by-step explanation:

In computing net cash flows from operating activities using the indirect method, several adjustments need to be made to net income. One of these adjustments is to add back any non-cash expenses, such as depreciation and amortization. Another adjustment is to add back any loss on the sale of assets and deduct any gain on the sale of assets since these gains and losses do not affect cash flows from operations.

With regards to the given options, preferred dividends declared and paid, a decrease in accounts receivable, and an increase in inventory should all be added to net income when computing net cash flows from operating activities using the indirect method. This is because these changes do not involve the movement of cash and therefore need to be adjusted to reflect the actual cash flows.

On the other hand, a decrease in accounts payable should be subtracted from net income when computing net cash flows from operating activities using the indirect method. This is because a decrease in accounts payable represents a cash outflow since it involves the payment of liabilities.