Question

Adjustments to Net Income with the Indirect Method

Assume that a company uses the indirect method to prepare the Operating Activities section of the statement of cash flows.

For each of the following items, indicate whether it would be Added to net income, Deducted from net income, or Not Reported in this section of the statement under the indirect method.

The options for each are added, deducted or not reported

1. Depreciation expense
2. Gain on sale of used delivery truck
3. Increase in accounts receivable
4. Increase in accounts payable
5. Purchase of new delivery truck
6. Loss on retirement of bonds
7. Increase in prepaid rent
8. Decrease in inventory
9. Issuance of note payable due in three years
10. Amortization of patents

Answer 1

Answer-

1	Depreciation expense	Added to net income
2	Gain on sale of used delivery truck	Deducted from net income
3	Increase in accounts receivable	Deducted from net income
4	Increase in accounts payable	Added to net income
5	Purchase of new delivery truck	Not Reported in operating activities section of the statement under the indirect method.
6	Loss on retirement of bonds	Added to net income
7	Increase in prepaid rent	Deducted from net income
8	Decrease in inventory	Added to net income
9	Issuance of note payable due in three years	Not Reported in operating activities section of the statement under the indirect method.
10	Amortization of patents	Added to net income