Which of the following is an adjustment that would need to be made to net income...
Which of the following is an adjustment that would need to be made to net income when calculating cash flows from operations under the indirect method?
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A. Subtract amortization expense
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B. subtract gain on sale of subsidiary
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C. add an increase in accounts receivable
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D. add a decrease in accounts payable
Homework Answers
Answer
- Correct Answer = Option ‘B’ Subtract GAIN on sale of subsidiary
from Net Income as an adjustment when calculating cash flows from
operations under indirect method.
This is because GAIN on sale of investment (in subsidiary) has a tendency of increasing the Net Income on Income Statement. Hence, to get the ‘cash flows from OPERATING activities’, such increased net income is SUBTRACTED. - Other options are incorrect because:
>Amortisation expenses and depreciation expenses are ADDED
>Increase in Account receivables is SUBTRACTED,
>Decrease in Account payable is SUBTRACTED.
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