Reliance Corporation has provided the following information for the year ended December 31, 2016: • The equipment account balance increased $200,000.
• The equipment accumulated depreciation account balance increased $35,000.
• Equipment costing $50,000 was sold during the year resulting in a $10,000 gain.
• Depreciation expense recorded on the equipment during the year was $65,000.
Which of the following statements is correct with respect to determining cash flow from operating activities?
A)Using the indirect method, net income is increased by the $35,000 increase in the accumulated depreciation account balance.
B)Using the indirect method, net income is decreased by the $30,000 sales price of the equipment.
C)Using the indirect method, net income is increased by the $65,000 depreciation expense.
D)Using the indirect method, net income is increased by the $10,000 gain on the sale of the equipment.

Question

Quizplus · Accepted Answer

Under the indirect method of determining cash flow from operating activities, net income is adjusted for non-cash items such as depreciation expense. Therefore, net income is increased by the $65,000 depreciation expense recorded on the equipment during the year. The increase in accumulated depreciation does not affect net income and is used to calculate the depreciation expense. The sale of equipment is a cash inflow from investing activities and does not affect net income.

Reliance Corporation Has Provided the Following Information for the Year