Question

Which of the following is a correct statement of one of the rules for converting net income to the cash flow from operating activities using the indirect method? Multiple Choice Increases in current assets are added to net income. All noncash expenses and losses are subtracted from net income. Decreases in current assets are subtracted from net income. Increases in current liabilities are added to net income.

Answer 1

Answer:

The correct option is increases in current liabilities are added to net income.

Explanation:

The rationale for adding increases in current liabilities is that the increase in current liabilities represents cash that should have been paid but retained in the business,hence it is an increase in cash inflow.

The opposite is the case for reduction in current liabilities as the reduction denotes that cash of the business has been used in paying the creditors,hence cash has gone down.The appropriate treatment would to subtract the reduction in current liabilities