11) MC Qu. 117 The most recent comparative ... The most recent comparative balan
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Question
11) MC Qu. 117 The most recent comparative ...
The most recent comparative balance sheet of Giacomelli Corporation appears below:
Ending Balance
Beginning Balance
Assets:
Current assets:
Cash and cash equivalents
$37,000
$29,000
Accounts receivable
20,000
24,000
Inventory
65,000
61,000
Prepaid expenses
5,000
7,000
Total current assets
127,000
121,000
Property, plant, and equipment
424,000
399,000
Less accumulated depreciation
231,000
200,000
Net property, plant, and equipment
193,000
199,000
Total assets
$320,000
$320,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$19,000
$17,000
Accrued liabilities
58,000
51,000
Income taxes payable
47,000
42,000
Total current liabilities
124,000
110,000
Bonds payable
77,000
80,000
Total liabilities
201,000
190,000
Stockholders’ equity:
Common stock
31,000
30,000
Retained earnings
88,000
100,000
Total stockholders’ equity
119,000
130,000
Total liabilities and stockholders’ equity
$320,000
$320,000
The company uses the indirect method to construct the operating activities section of its statements of cash flows.
Which of the following is correct regarding the operating activities section of the statement of cash flows?
A)The change in Accounts Receivable will be subtracted from net income; The change in Inventory will be subtracted from net income
B)The change in Accounts Receivable will be subtracted from net income; The change in Inventory will be added to net income
C)The change in Accounts Receivable will be added to net income; The change in Inventory will be subtracted from net income
D)The change in Accounts Receivable will be added to net income; The change in Inventory will be added to net income
Ending Balance
Beginning Balance
Assets:
Current assets:
Cash and cash equivalents
$37,000
$29,000
Accounts receivable
20,000
24,000
Inventory
65,000
61,000
Prepaid expenses
5,000
7,000
Total current assets
127,000
121,000
Property, plant, and equipment
424,000
399,000
Less accumulated depreciation
231,000
200,000
Net property, plant, and equipment
193,000
199,000
Total assets
$320,000
$320,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$19,000
$17,000
Accrued liabilities
58,000
51,000
Income taxes payable
47,000
42,000
Total current liabilities
124,000
110,000
Bonds payable
77,000
80,000
Total liabilities
201,000
190,000
Stockholders’ equity:
Common stock
31,000
30,000
Retained earnings
88,000
100,000
Total stockholders’ equity
119,000
130,000
Total liabilities and stockholders’ equity
$320,000
$320,000
Explanation / Answer
when preparing cash flow statement using indirect method non cash expenses like depreciation, loss on sale of assets will add back and non cash gains like gain on sale of assets will deduct from net income. also Increase in current assets and decrease in current liabilities will deduct and decrease in current assets and increase in current liabilities will add to net income.
in given question accounts receivable is decreased. so it will add to net income and inventory is increased so it will deduct from net income. so answer will be:
C)The change in Accounts Receivable will be added to net income; The change in Inventory will be subtracted from net income
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