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:

Stockholders' Equity

The portion of a company's assets that belongs to the shareholders after debts and liabilities have been settled.

Common Stock

Shares representing ownership in a company, entitling holders to vote at shareholder meetings and receive dividends.

Net Income

The conclusive earnings a company retains after all operational costs and taxes are taken away from the revenues.

Statement of Cash Flows

A financial document that provides a summary of the cash inflows and outflows for a company over a specific period of time, showing how it raises and spends money.