MC Qu. 81 Assume a company uses the indirect ... Assume a company uses the indir

Question

MC Qu. 81 Assume a company uses the indirect ...

Assume a company uses the indirect method to prepare its statement of cash flows. If the Supplies account increases and Salaries and Wages Payable decreases during an accounting period, what does the company do with the changes in these accounts to calculate cash flows from operating activities?

1,Both are added to net income.

2.The change in Salaries and Wages Payable is added to net income; the change in Supplies is subtracted from net income.

3.Both are subtracted from net income.

4.The change in Supplies is added to net income; the change in Salaries and Wages Payable is subtracted from net income.

Explanation / Answer

Under indirect method of statement of cash flow if any current assets increase and current liabilities decrease it should be deducted from net income and if any current assets decreases and current liabilities increases it should be added in net income.

so in this question supplies increase so it should be deducted from net income and salary and wages payable decrease so it should be deducted from net income.

so answer is 3.Both are subtracted from net income.

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