Question

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. An increase in wages payable will be added to 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. A gain on the sale of a depreciable asset will be subtracted from net income.

Answer 1

Answer:

C. An increase in income taxes payable will be subtracted from net income.

Explanation:

First and foremost, an increase in current assets such as prepaid expenses means that the company parted with cash since it has made payment in advance prior to the expenses being incurred, hence, it is a cash outflow while a decrease in the current asset has an opposite impact.

However, an increase in current liabilities means the company is owing more and has avoided a cash outflow, in essence, it is treated as cash inflow, in other words, the increase in income taxes payable is an inflow not deducted as if it is an outflow