Cornwall Co.reported a wage expense of $250,000 during 2014.Wages payable on January 1, 2014, were $5,000, and on December 31st were $7,500.If Cornwall prepares their cash flow statement using the indirect method, what adjustment to the net income will be made for the year for Cornwall when calculating their cash flow from operations?

Question

Quizplus · Accepted Answer

The increase in wages payable from $5,000 to $7,500 indicates that not all of the wage expense was paid in cash. The difference of $2,500 ($7,500 - $5,000) represents the increase in wages payable, which means it is an amount that increased the expense on the income statement but was not paid in cash. Therefore, it should be added back to net income in the cash flow from operations section of the cash flow statement when using the indirect method.