Indicate whether each of the following would be added to or deducted from net in
ID: 2508896 • Letter: I
Question
Indicate whether each of the following would be added to or deducted from net income in determining net cash flow from operating activitles by the indirect method: 12 POINTS (a) Increase in prepaid expenses (b) Amortization of patents (c) Increase in salaries payable (d) Gain on sale of fixed assets (e) Decrease in accounts receivable (0 Increase in notes receivable due in 60 days (g) Amortization of discount on bonds payable Decrease in merchandise inventory (0 Depreciation of fixed assets 0 Loss on retirement of long-term debt (k) Decrease in accounts payable (D Increase in income taxes payableExplanation / Answer
(a) Increase in prepaid expense is an increase in current assets and hence should be deducted from net income.
(b) Amortization of patents is a non cash expense and hence should be added back to net income.
(c) Increase in salaries payable in an increase in current liability and hence should be added to net income in determining cash flow from operating activities.
(d) Gain on sale of fixed assets is a non operating income and hence should be deducted from net income in determining cash flow from operating activities.
(e) Decrease in accounts receivable is considered as decrease in current assets and should be added to net income in determining cash flow from operating activities.
(f). Increase in notes receivable is increase in current liability and hence should be added to net income in determining cash flow from operating activities.
(g). Amortization of discount on bonds payable is non operating expense which was earlier deducted from net income and hence now it should be added back to net income in determining cash flow from operating activities.
(h) Decrease in merchandise inventory is a decrease in current assets and hence should be added to net income in determining cash flow from operating activities.
(i) Depreciation of fixed assets is a non cash expense and hence should be added back to net income in determining cash flow from operating activities.
(j).Loss on retirement of long-term debt is a non operating expense and should be added back to net income in determining cash flow from operating activities.
(k) Decrease in accounts payable is a decrease in current liability and hence should be deducted from net income in determining cash flow from operating activities.
(L) Increase in income tax payable is an increase in current liability and hence should be added to net income in determining cash flow from operating activities.