A company uses the direct method to prepare the statement of cash flows.It presents the following amounts on its financial statements.

*Relates solely to the acquisition of inventory
What will appear in the operating activities section related to salaries payable?
A)The increase of $3,500 will be subtracted from salary expense to determine payments to employees.
B)The increase of $3,500 will be subtracted from net income.
C)The increase of $3,500 will be added to salary expense to determine payments to employees.
D)The increase of $3,500 will be added to net income.

Question

A company uses the direct method to prepare the statement of cash flows.It presents the following amounts on its financial statements.

*Relates solely to the acquisition of inventory
What will appear in the operating activities section related to salaries payable?
A)The increase of $3,500 will be subtracted from salary expense to determine payments to employees. 
B)The increase of $3,500 will be subtracted from net income. 
C)The increase of $3,500 will be added to salary expense to determine payments to employees. 
D)The increase of $3,500 will be added to net income.

Quizplus · Accepted Answer

Salaries payable is a current liability account, which means an increase in this account indicates an increase in the amount owed to employees for salaries earned but not yet paid. The increase of $3,500 in salaries payable will be subtracted from salary expense to determine payments to employees in the operating activities section. This is because the direct method requires adjusting net income for changes in current assets and liabilities, such as salaries payable.

A Company Uses the Direct Method to Prepare the Statement