When using the indirect method for operating activities on the Statement of Cash Flows and the balance of the Supplies account increases, the increase should be:Group of answer choicesNot considered in calculating operating activities.Subtracted from Net Income.Added to Investing activities.Added to Net Income.
Question
When using the indirect method for operating activities on the Statement of Cash Flows and the balance of the Supplies account increases, the increase should be:Group of answer choicesNot considered in calculating operating activities.Subtracted from Net Income.Added to Investing activities.Added to Net Income.
Solution
When using the indirect method for operating activities on the Statement of Cash Flows, an increase in the balance of the Supplies account should be subtracted from Net Income.
Here's why:
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The indirect method starts with net income and then adds or subtracts items to convert that amount to the cash amount reported in the operating activities section.
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If the Supplies account increases, it means that more supplies were purchased during the period. This is an outflow of cash, but it doesn't reduce net income because it's recorded as an asset (Supplies) rather than an expense.
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Therefore, to adjust net income to the cash basis, the increase in Supplies should be subtracted from net income. This reflects the cash outflow for the purchase of supplies that wasn't deducted in calculating net income.
So, the correct answer is: "Subtracted from Net Income."
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