Question

Assume the indirect method is used to compute net cash flows from operating activities. For this item extracted from the financial statements Depletion Expense, indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following:

A. Added to Net Income
B. Deduct from Net Income
1. Increase in accounts receivable
2. Increase in inventory
3. Decrease in prepaid expenses
4. Decrease in accounts payable
5. Increase in accrued liabilities
6. Increase in income taxes payable
7. Depreciation expense
8. Loss on sale of investment
9. Gain on disposal of equipment
10. Amortization expense

Answer 1

1.B

2.B

3.A

4.B

5.A

6.A

7.A

8.A

9.B

10.A

Step-by-step explanation:

The Net Income is adjusted with non-cash items and changes in working capital to reach Net Cash Flow from Operating Activities.

The Non Cash Expenses previously deducted must be added back whilst the Incomes previously included must be deducted from it.

The items that increase Working Capital must be deducted whilst items that decrease working capital must be added back.