Under indirect method, which of the following items must be deducted from reported net income to determine net cash flow from operating activities?

Depreciation of fixed assets

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Decreases in current assets

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Decreases in current liabilities

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Loss on sale of equipment

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Solution

The correct option is C Decreases in current liabilities
Indirect method of ascertaining cash flow from operating activities begins with the amount of net profit/loss. Some important adjustments related to changes in working capital which is necessary to convert net profit/loss which is based on accrual basis into cash flows from operating activities i.e. increase in current assets, decrease in current liabilities should be deducted, and decrease in current assets, increases in current liabilities should be added to net profit/loss.

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Which of the following items would be subtracted from net income when using the indirect method of calculating cash flows provided by operating activities?

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Use the following information to calculate net cash flow from operating activities using indirect method:

$\begin{matrix} Net Income & 7, 000 Depreciation Expense & 1, 000 Increase in Accounts Receivable & 4, 400 Increase in Prepaid Rent & 7, 000 Decrease in Prepaid Insurance & 1, 300 Increase in Accounts Payable & 14, 000 Increase in Wages Payable & 1, 000 Decrease in Income Tax Payable & 700 Gain on Sale of Equipment & 1, 800 \end{matrix}$

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