Which of the following would be subtracted from net income when determining cash flows from operating activities under the indirect method?
A)An increase in accounts payable.
B)Depreciation expense.
C)A decrease in prepaid insurance.
D)A gain on the sale of a depreciable asset.

Question

Quizplus · Accepted Answer

Depreciation expense is added back to net income because it is a non-cash expense. Increases in accounts payable and decreases in prepaid insurance are adjustments for changes in working capital that actually increase cash flow, so they are added to net income. A gain on the sale of a depreciable asset is subtracted because it increases net income but does not affect cash flow from operating activities; the cash effects are considered under investing activities.

Which of the Following Would Be Subtracted from Net Income