Question

Freemont Company's Account Payable 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) Increase in Accounts Payable and Decrease in Income Taxes Payable
2) Decrease in Accounts Payable and Increase in Income Taxes Payable
3) Increase in Accounts Payable and Increase in Income Taxes Payable
4) Decrease in Accounts Payable and Decrease in Income Taxes Payable

Answer 1

The correct treatment within the operating activities section of the statement of cash flows using the indirect method for a decrease in accounts payable and an increase in income taxes payable is option 2) Decrease in Accounts Payable and Increase in Income Taxes Payable. Hence, option (2) is correct.

Step-by-step explanation:

The correct treatment within the operating activities section of the statement of cash flows using the indirect method for Freemont Company's Account Payable to decrease by 4,000 and its Income Taxes Payable to increase by 3,000 during the year would be option 2) Decrease in Accounts Payable and Increase in Income Taxes Payable.

When a company's accounts payable decrease, it means that it has made payments to its suppliers, which is a cash outflow in the operating activities section. On the other hand, an increase in income taxes payable indicates that the company has accrued more taxes during the year, which is a non-cash expense. Therefore, it should be added back to net income in the operating activities section.

By selecting option 2) Decrease in Accounts Payable and Increase in Income Taxes Payable, both the decrease in accounts payable and the increase in income taxes payable are correctly reflected in the statement of cash flows using the indirect method.