When operating cash flows are calculated using the indirect method, if Accrued Liabilities decreased, then the change is ______ during the period.Multiple choice question.added to net income because less cash was paid than expensedadded to net income because more cash was paid than expenseddeducted from net income because less cash was paid than expenseddeducted from net income because more cash was paid than expensed
Question
When operating cash flows are calculated using the indirect method, if Accrued Liabilities decreased, then the change is ______ during the period.Multiple choice question.added to net income because less cash was paid than expensedadded to net income because more cash was paid than expenseddeducted from net income because less cash was paid than expenseddeducted from net income because more cash was paid than expensed
Solution
The correct answer is: "added to net income because more cash was paid than expensed"
Here's why:
When using the indirect method to calculate operating cash flows, we start with net income and then adjust for changes in operating assets and liabilities.
Accrued liabilities are expenses that a company has incurred but has not yet paid. If accrued liabilities decrease, it means that the company has paid off some of these expenses.
Since the company has paid more cash than it has expensed, this decrease in accrued liabilities is added to net income when calculating operating cash flows. This is because the payment of these liabilities has reduced the company's cash balance, but it was not accounted for in the net income. Therefore, to get a true picture of the cash flow, we add this payment to the net income.
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