Question

Freemont Company's Account Receivable decrease by 4,000 and its Income Taxes Payable increased by 3,000 during the year. Which of the following is the correct treatment within the operating activities section of the statement of cash flows using the indirect method?

1) Add 4,000 to net income and subtract 3,000 from net income
2) Subtract 4,000 from net income and add 3,000 to net income
3) Add 4,000 to net income and add 3,000 to net income
4) Subtract 4,000 from net income and subtract 3,000 from net income

Answer 1

The correct treatment within the operating activities section of the statement of cash flows using the indirect method is to subtract $4,000 from net income and add $3,000 to net income.

Step-by-step explanation:

The correct treatment within the operating activities section of the statement of cash flows using the indirect method is option 2) Subtract $4,000 from net income and add $3,000 to net income.

When Account Receivable decreases, it means that the company collected cash from its customers, which is an increase in cash flow from operating activities.

This should be added back to net income to reflect the actual cash generated. Income Taxes Payable increasing indicates an increase in taxes owed, which is an expense and should be added back to net income. Therefore, the correct treatment is to subtract $4,000 from net income and add $3,000 to net income.