Question

Accountants can use a three-step process to determine cash provided (or used) by investing activities. Which of the following steps is not part of this process? Identify adjustments to net income. Report their cash flow effects. Identify changes in investing-related accounts. Explain these changes using T-accounts.

Answer 1

Answer:

D. Identify Adjustments to Net Income

Explanation:

Step 1: Understand the Part of the Financial Statement that carries information on Cash flow (Cash provided or utilised for investing activities) and this is the Cash Flow Statement.

Understanding this will assist the student to know those treatments and steps that are necessary.

Step 2: Since the Cash Flow Statement has been identified, then the listed steps can be considered one after the other

a. Identify adjustments to net income- this statement is not a part of the process because making adjustments to net income is primarily carried out in the Statement of Income or Comprehensive Income. Hence it is not required in determining the cash for investment activities. If at all, it is required when deciding Cash flow for Operating Activities

b. Report their Cash Flow effects - This is a crucial step in reporting inflows and outflows for investing activities

C. Explain these changes using T-accounts- Since, a good accounting process practices the double-entry principle, the T-accounts process is essential in explaining how a change in a particular account affect the double-entry process in another account and this is relevant to investing activities as well.