Question

To arrive at net cash provided by operating activities, it is necessary to report revenues and expenses on a cash basis. This is done by
A) re-recording all income statement transactions that directly affect cash in a separate cash flow journal
B) estimating the percentage of income statement transactions that were reported statement transactions originally on a cash basis and projecting this amount to the entire array of income
C) eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash eliminating all transactions that have no current or future effect on
D) cash, such as depreciation, from the net income computation an increase in ending adjustment to reported net earnings

Answer 1

Answer: C) eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash

Explanation:

The income statement comprises of entries that are not cash based in nature but help in the computation of taxes amongst other things such as depreciation and amortization.

When calculating net cash provided from operating activities therefore the income calculated should be adjusted for any expenses or revenue that are not cash based in nature and so will not result in a corresponding increase or decrease in cash.

For instance, adding back depreciation and amortization to the net cash balance as both do not actually reduce the cash balance of the company.