Which of the following would be added to net income using the indirect method
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The discussion on the indirect method of preparing the statement of cash flows refers to the line items in the following statement and the information previously given about the Brothers' Quintet, Inc. Show
 Operating activities Although the total cash provided by operating activities amount is the same whether the direct or indirect method of preparing the statement of cash flows is used, the information is provided in a different format. The indirect method assumes everything recorded as a revenue was a cash receipt and everything recorded as an expense was a cash payment. Remember that under the accrual basis of accounting, revenues and expenses are recorded following the revenue recognition and matching principles which do not require cash receipts to record revenues or cash payments to record expenses. The operating activities section starts with net income per the income statement and adjusts it to remove the significant non‐cash items. Significant non‐cash items on the income statement include depreciation and amortization expense and gains and losses from the sales of assets or retirement of debt. As depreciation expense and amortization expense are deducted in calculating net income (expenses are subtracted from revenues to determine net income), and depreciation and amortization expense do not result in cash payments by the company, depreciation expense and amortization expense are added back to net income. Given the financial statements and information for the Brothers' Quintet, Inc., net income is $6,300. Net income first needs to be adjusted by significant non‐cash items from the income statement: depreciation expense and the loss on the sale of the equipment. Next, net income is adjusted for the changes in most current asset, current liability, and income tax accounts on the balance sheet. The accounts receivable balance decreased $663 from $19,230 to $18,567. As cash is increased when cash is collected from customers, a decrease in the accounts receivable balance represents an increase in cash. Therefore, the $663 is added back to net income. If the accounts receivable balance increases, the amount of the increase is subtracted from net income, the opposite of what happens when the balance decreases. The inventory balance increased $107. As inventory is purchased, cash is assumed to be paid, so the $107 increase in the inventory balance is subtracted from net income (a decrease in the inventory balance would be added to net income). Similarly, the $142 increase in the prepaid expenses balance is also deducted from net income. The accounts payable balance decreased $919. When cash is paid to a supplier for purchases previously made on account, cash decreases. Thus, a decrease in the accounts payable balance represents a decrease in cash and the $919 decrease is subtracted from net income. An increase in the accounts payable, or any current liability account balance is added to net income. The wages payable balance increased because a larger accrual was made to represent wages owed at the end of 20X1 than 20X0. Accrued wages are owed but not paid at the end of the month. An increase in a current liability account balance means cash has not been paid and therefore, the $320 increase in the wages payable balance is added to net income. The decrease in the accrued expenses balance of $1,295 is subtracted from net income. Once all of the changes in the current asset, current liability, and income tax accounts have been listed, the total cash provided by (used by) operating activities is determined by totaling all of the activity. Notice the amounts of any decreases are in parentheses. Investing activities and financing activities The investing and financing sections of the statement of cash flows are prepared in the same way for the indirect method as for the direct method. Chapter 7: Funds Analysis, Cash Flow Analysis, and Financial PlanningJust click on the button next to each answer and you'll get immediate feedback.Note: Your browser must support JavaScript in order to use this quiz. 1. According to the accounting profession, which of the following would be considered a cash-flow item from an "investing" activity?cash inflow from interest income. cash inflow from dividend income. cash outflow to acquire fixed assets. all of the above. 2. According to the Financial Accounting Standards Board (FASB), which of the following is a cash flow from a "financing" activity?cash outflow to the government for taxes. cash outflow to shareholders as dividends. cash outflow to lenders as interest. cash outflow to purchase bonds issued by another company. 3. If the following are balance sheet changes: $5,005 decrease in accounts receivable $7,000 decrease in cash $12,012 decrease in notes payable $10,001 increase in accounts payable a "use" of funds would be the:$7,000 decrease in cash. $5,005 decrease in accounts receivable. $10,001 increase in accounts payable. $12,012 decrease in notes payable. 4. On an accounting statement of cash flows an "increase(decrease) in cash and cash equivalents" appears asa cash flow from operating activities. a cash flow from investing activities. a cash flow from financing activities. none of the above. 5. Uses of funds include a (an):decrease in cash. increase in any liability. increase in fixed assets. tax refund. 6. Which of the following would be included in a cash budget?depreciation charges. dividends. goodwill. patent amortization. 7. An examination of the sources and uses of funds statement is part of:a forecasting technique. a funds flow analysis. a ratio analysis. calculations for preparing the balance sheet. 8. Which of the following is NOT a cash outflow for the firm?depreciation. dividends. interest payments. taxes. 9. Which of the following would be considered a use of funds?a decrease in accounts receivable. a decrease in cash. an increase in account payable. an increase in cash. 10. The cash flow statement in the United States is most likely to appear usinga "supplementary method." a "direct method." an "indirect method." a "flow of funds method." 11. For a profitable firm, total sources of funds will always total uses of funds.be equal to be greater than be less than have no consistent relationship to Retake Quiz Multiple-Choice Quiz questions are Copyright © by Pearson Education Limited. Used by permission. All rights reserved. Previous Quiz |Back to Main Index | Next QuizWhat is added to net income using the indirect method?Under the indirect method, since net income is a starting point in measuring cash flows from operating activities, depreciation expense must be added back to net income. Companies may add other expenses and losses back to net income because they do not actually use company cash in addition to depreciation.
Which of the following would be added to net income using the indirect method for preparing the statement of cash flows?In determining the cash flows from operating activities for the statement of cash flows by the indirect method, the depreciation expense for the period is added to the net income for the period.
Which of the following would be subtracted from net income using the indirect method?Answer and Explanation: The correct answer is b. An increase in accounts receivable.
Which of the following is not added to net income using indirect method?Interest Expense(s) are NOT added back to net income when using the indirect method to prepare a statement of cash flows.
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