Using the Indirect Method, Decreases in Current Assets and Increases

question 6

Multiple Choice

Using the indirect method, decreases in current assets and increases in current liabilities are both added to net income, whereas increases in current assets and decreases in current liabilities are both subtracted from net income to convert it to net cash flow. Noncash expenses such as depreciation are added back to net income.
$$\begin{array} { | r | r | r | r | r | r | r | } \hline \begin{array} { r } \text { Cash flow } \\\text { from } \\\text { operating } \\\text { activities }\end{array} & \begin{array} { r } \text { Net } + \\\text { Income }\end{array} & \text { Depreciation- } & \begin{array} { r } \text { Change } + \\\text { in } \\\text { Act/Rec }\end{array} & \begin{array} { c } \text { Change in - } \\\text { inventory }\end{array} & \begin{array} { r } \text { Change in } \\\text { Act/Payables }\end{array} \\\hline \$ 22,500 & \$ 20,000 & \$ 10,000 & \$ 6,500 & \$ 7,000 & \$ 8,000 \\\hline\end{array}$$
-Depreciation is added back to net income in a statement of cash flows prepared using the indirect method because it:

• A)reduces income but not cash.
• B)is a cash inflow.
• C)is a revenue.
• D)is a valuation concept.

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Definitions:

Stock Dividend

A distribution of additional shares to the existing shareholders of a company, proportionate to their current shareholding.

Ratification

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Authorized Act

An action taken by an individual or entity that has been given official permission or power to do so, typically within a legal or organizational context.

Corporation's Acceptance

The formal agreement by a corporation to abide by legal obligations or contracts, often signified through a resolution by its board of directors.