Indicate Whether Each of the Following Would Be Added to or Subtracted

question 2

Essay

Indicate whether each of the following would be added to or subtracted from net income when using the indirect method to reconcile net income to cash flows from operating activities.
$$\begin{array} { | l | c | } \hline { \begin{array} { c } \text { Item Required to Convert Net Income to Cash Flows From } \\\text { Operating Activities }\end{array} } & \begin{array} { c } \text { Added to or } \\\text { Subtracted From }\end{array} \\\hline \text { Increase in Accounts Receivable } & \\\hline \text { Decrease in Accounts Payable } & \\\hline \text { Decrease in Inventory } & \\\hline \text { Increase in Accrued Expenses } & \\\hline \text { Depreciation Expense } & \\\hline \text { Increase in Prepaid Expenses } & \\\hline\end{array}$$

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Definitions:

Contribution Margin

The amount of revenue remaining after variable costs have been deducted, which contributes to covering fixed costs and generating profit.

Opportunity Cost

The expense associated with missing out on the second-best option when a choice is made.

Contribution Margin

The difference between sales revenue and variable costs, indicating how much revenue is available to cover fixed costs and generate profit.

Variable Cost

Costs that change in proportion to the level of activity or volume of production, such as materials and labor.