Question

Indicate whether the following would be ADDED to or SUBTRACTED from net income to calculate the cash flows from operating activities using the indirect method.

Increase in Accounts Payable [ Select ] ["ADD", "SUBTRACT"]
Increase in Inventory [ Select ] ["SUBTRACT", "ADD", "", ""]
Increase in Accounts Receivable [ Select ] ["SUBTRACT", "ADD"]
Increase in Income Tax Payable [ Select ] ["ADD", "SUBTRACT"]
Increase in Prepaid Expenses [ Select ] ["SUBTRACT", "ADD"]
Decrease in Interest Payable [ Select ] ["SUBTRACT", "ADD"]
Decrease in Accrued Revenue [ Select ] ["ADD", "SUBTRACT"]
Decrease in Wages Payable [ Select ] ["SUBTRACT", "ADD"]
Decrease in Accounts Receivable [ Select ] ["ADD", "SUBTRACT"]
Decrease in Accounts Payable [ Select ] ["SUBTRACT", "ADD"]

Answer 1

To compute the cash flows from operating activities using the indirect method, increases in liabilities and decreases in assets generally result in additions to net income, whereas increases in assets and decreases in liabilities generally result in deductions from net income.

Step-by-step explanation:

When calculating cash flows from operating activities using the indirect method, certain adjustments are made to net income to reflect the cash transactions. Here are the adjustments for each scenario:An increase in Accounts Payable would be ADDED because this implies that the company has more cash since it has not paid out that cash yet.An increase in Inventory would be SUBTRACTED, indicating that cash has been used to purchase more inventory.An increase in Accounts Receivable would be SUBTRACTED, since this means that sales have been made on credit and cash has not been received.An increase in Income Tax Payable would also be ADDED as it indicates taxes incurred but not yet paid, thus more cash on hand.An increase in Prepaid Expenses would be SUBTRACTED, as this is an outflow of cash for future expenses.A decrease in Interest Payable would be SUBTRACTED since it implies a cash outflow to settle the interest obligations.A decrease in Accrued Revenue would be ADDED, reflecting an earlier receipt of cash lowering accrued revenues.A decrease in Wages Payable would be SUBTRACTED, since this suggests actual payment of wages, reducing cash.A decrease in Accounts Receivable would be ADDED as it reflects a reduction in credit sales and an increase in cash received.A decrease in Accounts Payable would be SUBTRACTED because it indicates the payment to creditors, thus reducing available cash.