Under the Indirect Method, When Calculating Cash Flows from Operating

question 42

Multiple Choice

Under the indirect method, when calculating cash flows from operating activities, a gain on the sale of equipment is:

• A) subtracted from net income.
• B) added to net income.
• C) only the proceeds are added to net income.
• D) ignored since this transaction does not affect cash.

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Definitions:

Conversion Cost

The total cost of converting raw materials into finished goods, including labor and overhead expenses.

Materials Cost

The total expense incurred for the raw materials that are used in the production of goods or services.

Work in Process

Inventory that includes goods in production but not yet completed; part of the manufacturing process between raw materials and finished products.

Conversion Costs

The sum of labor costs and overhead expenses involved in converting raw materials into finished goods.