If a Company Uses the Indirect Method to Determine Net

question 70

Multiple Choice

If a company uses the indirect method to determine net cash flows from operating activities:

• A) gains must be added to net income and losses subtracted from net income.
• B) gains and losses must be added to net income.
• C) gains must be subtracted from net income and losses added to net income.
• D) gains and losses must be subtracted from net income.

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Definitions:

Variable Costing

An accounting method that includes only variable costs—direct materials, direct labor, and variable manufacturing overhead—in product cost calculations.

Absorption Costing

A product costing technique in accounting that involves adding direct materials, direct labor, and both kinds of manufacturing overhead—variable and fixed—to the product's cost.

Fixed Manufacturing Overhead

Costs that do not change with the level of production output, including rent, salaries of permanent staff, and depreciation of factory equipment.

Variable Costing

An accounting method that includes only variable production costs in the cost of goods sold, excluding fixed costs.