Assume the indirect method is used to compute net cash flows from operating activities.For this item extracted from the financial statements-Increase in Prepaid Expenses-indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following:
A)Add to net income to arrive at net cash flows from operating activities.
B)Subtract from net income to arrive at net cash flows from operating activities.
C)Not used to adjust net income to calculate net cash flows from operating activities.

Question

Quizplus · Accepted Answer

An increase in prepaid expenses results in an outflow of cash, which does not affect net income as it is a non-operating expense. Therefore, it needs to be subtracted from net income to arrive at net cash flows from operating activities using the indirect method.

Assume the Indirect Method Is Used to Compute Net Cash