24) When using the indirect method to calculate and report net cash provided or

Question

24) When using the indirect method to calculate and report net cash provided or used by operating activities, which of the following is subtracted from net income? 24) A) Bad debts expense. B) Depreciation expense. C) Decrease in merchandise inventory D) Amortization of intangible assets. E) Decrease in income taxes payable. 25) Zhang Company reported Cost of Goods Sold of $835,000, beginning Inventory of $37.200 and ending Inventory of $46.300. The average Inventory amount is: 25) A) $41,750. B) $83,500. C) $37,200. D) $9,100. E) $46,300.

Explanation / Answer

Answer to Question 24:

Option E i.e. Decrease in Income Taxes Payable

While calculating Net Cash flow from Operating Activities, the following items are added:
a. Increase in Current Liabilities
b. Decrease in Current Assets
c. Non-Cash items such as Loss on sale of Non-Current Assets, Depreciation, Amortization etc. which was subtracted while calculating Net Income should be added to calculate Net Cash flow from Operating Activities.

Whereas, following items are deducted from Net Income:
a. Decrease in Current Liabilities
b. Increase in Current Assets
c. Non Cash items such as Gain on Sale of Non-Current Asset, which was added while calculating Net Income should be subtracted / deducted to calculate Net Cash flow from Operating Activities.

Therefore, Decrease in Income Taxes Payable should be subtracted from Net Income, while other items should be added in Net Income to calculate Net Cash flow from Operating Activities.

Answer to Question 25:

Option A i.e. $41,750

Average Inventory = (Beginning Inventory + Ending Inventory) / 2
Average Inventory = ($37,200 + $46,300) / 2
Average Inventory = $41,750

Answer to Question 26:

Option E i.e. $198,650

Working Capital = Current Assets – Current Liabilities
Working Capital = $306,450 - $107,800
Working Capital = $198,650

Answer to Question 27:

Option E i.e. 117%

Operating Expense Trend Percentage = Operating Expense, Year 2 / Operating Expense, Year 1 * 100
Operating Expense Trend Percentage = 63,421 / 54,305 * 100
Operating Expense Trend Percentage = 117%

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