19) MC Qu. 119 The most recent comparative ... The most recent comparative balan
ID: 2576982 • Letter: 1
Question
19) MC Qu. 119 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 Prepaid Expenses will be added to net income; The change in Income Taxes Payable will be subtracted from net income
B)The change in Prepaid Expenses will be subtracted from net income; The change in Income Taxes Payable will be subtracted from net income
C)The change in Prepaid Expenses will be subtracted from net income; The change in Income Taxes Payable will be added to net income
D)The change in Prepaid Expenses will be added to net income; The change in Income Taxes Payable 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
Answer
Whenever the cash flow statement is prepared using the indirect method, effects are given to the Net Income that relate to icreasing or decrease of actual cash inflows.
As such, to the Net Income, following tasks are undertaken----
1. Add: Decrease in Current Assets and Increase in Current liability
2. Less: Increase in Current Asset and Decrease in Current liability
On the basis of above impositions, the answer to your question can be summed up.
1. Prepaid expenses are part of current assets (operating activity). they were$7000 in the bginning and $5000 at the end. This shows that current assets have decreased. Therefore, the 'change' in Prepaid expenses will be ADDED to net Income.
2. Income taxes payable are part of current liabilities (operating activity). They were $42000 in the beginning and became $47000 at the end. Hence, they have increased. Therefore, the 'change' in Income taxes payable will also be ADDED to the Net income.
Hence, the correcr option is 'OPTION - D'
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