A company uses the direct method to prepare the statement of cash flows.It presents the following amounts on its financial statements. $$\begin{array} { | l | r | r | }
\hline & \text { End of this year } & \text { End of prior year } \
\hline \text { Accounts receivable } & \$ 110,000 & \$ 100,000 \
\hline \text { Cost of godds sald } & 560,000 & \
\hline \text { Sales revenue } & 830,000 & \
\hline \text { Accounts payable* } & 75,000 & 67,000 \
\hline \text { Inventary } & 86,000 &105,000 \
\hline \text { Salary payable } & 13,000 & 10,000\
\hline \text { Salary expense } & 49,000 & 45,000\
\hline
\end{array}$$
*Relates solely to the acquisition of inventory
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What will appear in the operating activities section related to salary payable?

Question

A company uses the direct method to prepare the statement of cash flows.It presents the following amounts on its financial statements. $$\begin{array} { | l | r | r | } 
\hline & \text { End of this year } & \text { End of prior year } \
\hline \text { Accounts receivable } & \$ 110,000 & \$ 100,000 \
\hline \text { Cost of godds sald } & 560,000 & \
\hline \text { Sales revenue } & 830,000 &  \
\hline \text { Accounts payable* } & 75,000 & 67,000 \
\hline \text { Inventary } & 86,000 &105,000  \
\hline \text { Salary payable } & 13,000 &  10,000\
\hline \text { Salary expense } & 49,000 & 45,000\
\hline
\end{array}$$
 *Relates solely to the acquisition of inventory
-
What will appear in the operating activities section related to salary payable?

Quizplus · Accepted Answer

The increase in salary payable represents an accrued liability for unpaid salaries owed to employees at the end of the period. As per the direct method, changes in current assets and liabilities are reported in the operating activities section to reconcile net income to cash flows from operating activities. An increase in salary payable means that the company owes more money to employees than at the beginning of the period, which reduces cash outflows related to salary expense. Therefore, the increase of $3,000 will be subtracted from salary expense to determine payments to employees.

A Company Uses the Direct Method to Prepare the Statement