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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Consider the following independent events:

  1. a. Gain on sale of an asset
  2. b. Increase in accounts receivable
  3. c. Decrease in prepaid insurance
  4. d. Amortization expense
  5. e. Increase in accounts payable
  6. f. Uncollectible accounts expense
  7. g. Decrease in wages payable
  8. h. Increase in inventories
  9. i. Depreciation expense

Required:

Indicate whether each event will be added to or deducted from net income in order to compute cash flow from operations.

To determine

Identify whether the events are added or subtracted from the net income while calculating cash flow from operations.

Explanation

Cash Flows from Operating Activities:

This category of a cash flow statement shows the operational and profit generating activities in a firm. The operating cash flows increase or decrease the current assets and current liabilities of a firm.

The events whether will be added or subtracted from the net income while calculating cash flow from operations is shown in the table below:

Serial No.EventsAdded to/ Deducted from
a.Gain on sale of an asset.Deducted fromThe gain on sale of a long-term asset is an investing activity which shows an increase in cash. To maintain the accrual basis, the amount is deducted from the net income.
b.Increase in accounts receivable.Deducted fromThe increase in accounts receivable shows that the cash collected from customers are more than the purchases. To maintain the accrual basis, the amount is deducted from the net income.
c.Decrease in prepaid insurance.Added toThe decrease in prepaid insurance shows that amount of insurance is paid in advance. To maintain the accrual basis, the amount is added to the net income.
d.Amortization expense.Added toThe amortization expense is the expense which is paid and is shown in the income statement...

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