When reconciling net income to net cash provided by operating activities, all of the following would be an appropriate procedure except _____.
A)adding depreciation expense
B)subtracting a decrease in accounts payable
C)subtracting a decrease in prepaid expenses
D)adding a decrease in inventories

Question

Quizplus · Accepted Answer

When reconciling net income to net cash provided by operating activities, depreciation expense is added back because it is a non-cash expense that reduced net income. A decrease in accounts payable indicates that more cash was paid out than was incurred in expenses, so it is subtracted. A decrease in inventories is added because it means less cash was spent on inventories, which does not affect net income but increases cash flow. However, subtracting a decrease in prepaid expenses is incorrect because a decrease in prepaid expenses is an indication that an expense has been recognized, which would have already reduced net income; adjusting for it again would not be appropriate in the reconciliation to net cash provided by operating activities.

When Reconciling Net Income to Net Cash Provided by Operating