Question

When preparing the statement of cash flows using the indirect method, a decrease in current liabilities is added to the net income to arrive at net cash flow from operating activities. group of answer choices

O true
O false

Answer 1

The statement in the question is false; a decrease in current liabilities is subtracted from the net income when using the indirect method to prepare the statement of cash flows, as it reflects cash paid to reduce those liabilities.

Step-by-step explanation:

When preparing the statement of cash flows using the indirect method, a decrease in current liabilities is subtracted from net income to arrive at net cash provided by operating activities. This is because when liabilities decrease, it often means the company has paid them off, which uses cash, thereby reducing the net cash from operations.

The overall goal of the cash flow statement is to reconcile the net income with the cash generated or used during the period. The adjustments made through the indirect method involve making changes to the net income figure to account for non-cash transactions, changes in working capital, and other items.

When current liabilities decrease, it implies that cash has been used to settle those liabilities; hence, this outflow of cash is not reflected in the net income figure, which is why it must be deducted when using the indirect method to accurately present the net cash from operating activities.