Which of the following statements does not correctly describe an adjustment to net income when determining cash flows from operating activities using the indirect method?

A) A gain on the sale of a depreciable asset will be subtracted from net income.

B) An increase in prepaid expenses will be subtracted from net income.

C) An increase in income taxes payable will be subtracted from net income.

D) An increase in wages payable will be added to net income. 2.5 po

Question

Business

Ezra Khan

3 June, 09:58

Which of the following statements does not correctly describe an adjustment to net income when determining cash flows from operating activities using the indirect method?

A) A gain on the sale of a depreciable asset will be subtracted from net income.

B) An increase in prepaid expenses will be subtracted from net income.

C) An increase in income taxes payable will be subtracted from net income.

D) An increase in wages payable will be added to net income. 2.5 po

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Answers (1)

Know the Answer?

Maurice Valdez · Answer 1

The correct answer is Option C.

Explanation:

A statement of cash flows shows actual cash movement (inflow / outflow) relating to operating, financing and investing activities of a company. Essentially, there are two methods used in determining cash flows, which are: (i) direct method (ii) indirect method.

The Option C is correct because the movement in income tax payable is used in determining the actual tax paid and this is subtracted from the net income in order to determine the cash flows from operating activities.

The other options are used as adjustments to net income in determining cash flows from operating activities using the indirect method.