When the direct method is used to determine the net cash flows from operating activities, which of the following adjustments must be made to income tax expense to determine total income tax payments?
A) Add all changes in income taxes and income taxes payable.
B) Add decreases in income taxes payable and subtract increases in income taxes payable.
C) Add increases in income taxes payable and subtract decreases in income taxes payable.
D) Subtract all changes in income taxes payable.

Question

Quizplus · Accepted Answer

When using the direct method to determine net cash flows from operating activities, income tax expense needs to be adjusted for changes in income taxes payable. Increases in income taxes payable represent a cash inflow (as taxes have been accrued but not yet paid), while decreases in income taxes payable represent a cash outflow (as taxes have already been paid). Therefore, to determine total income tax payments, decreases in income taxes payable should be added and increases in income taxes payable should be subtracted, resulting in option B as the correct answer.

When the Direct Method Is Used to Determine the Net