Assume a company uses the indirect method to prepare its statement of cash flows.If the Supplies account decreases and Salaries and Wages Payable increases during an accounting period,what does the company do with the changes in these accounts to calculate cash flows from operating activities?
A)Both are subtracted from net income.
B)The change in Salaries and Wages Payable is added to net income;the change in Supplies is subtracted from net income
C)Both are added to net income.
D)The change in Supplies is added to net income;the change in Salaries and Wages Payable is subtracted from net income.

Question

Quizplus · Accepted Answer

Cash purchases of supplies increase and the recording of supplies expense decreases the balance in the Supplies account.A decrease in Supplies means that cash purchases during the period were less than the amount of supplies used (and recorded as Supplies Expense).To convert from the higher expense number that is included in net income to the lower cash outlay,we add the decrease in Supplies to net income to calculate cash flows from operating activities.An increase in Salaries and Wages Payable means that payments to employees during the period were lower than the Salaries and Wages Expense that was subtracted in determining net income on the income statement.Thus,to show the lower cash outflow,the increase in Salaries and Wages Payable must be added to net income to calculate cash flows from operating activities.

Assume a Company Uses the Indirect Method to Prepare Its