Which of the following statements does not correctly describe an adjustment to net income when determining cash flows from operating activities using the indirect method?
A) A gain on the sale of a depreciable asset will be subtracted from net income.
B) An increase in prepaid expenses will be subtracted from net income.
C) An increase in income taxes payable will be subtracted from net income.
D) An increase in wages payable will be added to net income. 2.5 po

A statement of cash flows shows actual cash movement (inflow / outflow) relating to operating, financing and investing activities of a company. Essentially, there are two methods used in determining cash flows, which are: (i) direct method (ii) indirect method.

The Option C is correct because the movement in income tax payable is used in determining the actual tax paid and this is subtracted from the net income in order to determine the cash flows from operating activities.

The other options are used as adjustments to net income in determining cash flows from operating activities using the indirect method.

Martebi Martebi · Answer 2 · 2021-12-03T13:49:30+01:00

Adjustment is often made in income statement. The statements that does not correctly describe an adjustment to net income is An increase in income taxes payable will be subtracted from net income.

The indirect method uses net income as a main point to makes adjustments for all transactions for non-cash items. It often adjusts for all cash-based transactions.

An increase in an asset account is often subtracted from net income, and an increase in a liability account is therefore added back to net income

If a net income is adjusted for all non-cash expenses it is also adjusted for changes in working capital balance.

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