Krech Corporation's comparative balance sheet appears below: The company's net income (loss)for the year was ($3,000)and its cash dividends were $3,000.It did not sell or retire any property,plant,and equipment during the year.The company uses the indirect method to determine the net cash provided by operating activities. Which of the following is correct regarding the operating activities section of the statement of cash flows?
A)The change in Prepaid Expenses will be added to net income;The change in Income Taxes Payable will be subtracted from net income
B)The change in Prepaid Expenses will be subtracted from net income;The change in Income Taxes Payable will be subtracted from net income
C)The change in Prepaid Expenses will be subtracted from net income;The change in Income Taxes Payable will be added to net income
D)The change in Prepaid Expenses will be added to net income;The change in Income Taxes Payable will be added to net income

Question

Krech Corporation's comparative balance sheet appears below:  The company's net income (loss)for the year was ($3,000)and its cash dividends were $3,000.It did not sell or retire any property,plant,and equipment during the year.The company uses the indirect method to determine the net cash provided by operating activities. Which of the following is correct regarding the operating activities section of the statement of cash flows?
A)The change in Prepaid Expenses will be added to net income;The change in Income Taxes Payable will be subtracted from net income 
B)The change in Prepaid Expenses will be subtracted from net income;The change in Income Taxes Payable will be subtracted from net income 
C)The change in Prepaid Expenses will be subtracted from net income;The change in Income Taxes Payable will be added to net income 
D)The change in Prepaid Expenses will be added to net income;The change in Income Taxes Payable will be added to net income

Quizplus · Accepted Answer

The change in Prepaid Expenses represents an expense that was paid for in advance, so it is not an actual expense incurred during the period. Therefore, it will be subtracted from net income in the operating activities section. The change in Income Taxes Payable represents taxes owed but not yet paid, so it is not an actual expense paid during the period. Therefore, it will also be subtracted from net income in the operating activities section.

Krech Corporation's Comparative Balance Sheet Appears Below: the Company's