Question

Using the indirect method for reporting cash flows from operations, how should a decrease in unearned revenue be treated in relation to accrual-based net income?

A) Added to accrual-based net income.
B) Subtracted from accrual-based net income.
C) Ignored when calculating accrual-based net income.
D) Treated as a separate line item in the cash flow statement

Answer 1

A decrease in unearned revenue should be added to accrual-based net income when using the indirect method for reporting cash flows from operations.

Step-by-step explanation:

When using the indirect method for reporting cash flows from operations, a decrease in unearned revenue should be added to accrual-based net income. Unearned revenue represents cash received in advance for goods or services that have not yet been provided. As the revenue is earned and recognized in the accrual-based net income, it needs to be added back to calculate the cash flow from operations. This adjustment ensures that the cash flow statement accurately reflects the actual cash inflows and outflows during the period.