When Preparing the Operating Activities Section of the Statement of Cash

question 60

True/False

When preparing the operating activities section of the statement of cash flows using the indirect method,a decrease in accounts receivable is subtracted from net income.To convert net income to cash flows from operating activities,a decrease in accounts receivable means that sales revenue on the income statement is less than the amount of cash collected from customers;therefore,the decrease should be added to net income.

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Definitions:

Factory Overhead

All indirect manufacturing costs, including costs related to running the factory that cannot be directly tied to a specific product.

Prime Costs

The combination of direct material and direct labor costs that are directly involved in manufacturing a product.

Direct Labor

The work of factory employees that can be easily traced to the production of specific goods or services.

Factory Overhead

Indirect manufacturing costs not directly tied to production, including maintenance, utilities, and equipment depreciation.