Which of the following would be added to net income using the indirect method? An increase in accounts receivable An increase in prepaid expenses Depreciation expense A decrease in accounts payable

Question

Business

Krystal Mitchell

3 February, 16:51

Which of the following would be added to net income using the indirect method? An increase in accounts receivable An increase in prepaid expenses Depreciation expense A decrease in accounts payable

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Answers (1)

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Natalee Walton · Answer 1

Depreciation expense

Explanation:

There are three types of activities in the cash flow statement which are described below:

1. Operating activities: It includes those transactions which affect the working capital after net income. The increase in current assets and a decrease in current liabilities would be deducted whereas the decrease in current assets and an increase in current liabilities would be added.

These changes in working capital would be adjusted

2. Investing activities: It records those activities which include purchase and sale of the fixed assets

3. Financing activities: It records those activities which affect the long term liability and shareholder equity balance.

Depreciation is a non cash expense so it would be added in the net income under the indirect method.

This is the format:

Cash flow from Operating activities - Indirect method

Net income $6,700

Adjustment made:

Add : Depreciation expense

Add: Loss on sale of the asset

Less: Gain on sale of the asset

Add: Decrease in accounts receivable

Less: Increase in inventory

Less: Decrease in accounts payable

Add: Increase in salaries payable

Add: Increase in utility payable

Less: Decrease in prepaid insurance

Add: Increase in prepaid rent

Total of Adjustments

Net Cash flow from Operating activities