When the direct method is used to determine the net cash flows from operating activities, which of the following adjustments must be made to interest expense to determine total interest payments?
A) Add all changes in interest payable.
B) Add decreases in interest payable and subtract increases in interest payable.
C) Add increases in interest payable and subtract decreases in interest payable.
D) Subtract all changes in interest payable.

Question

Quizplus · Accepted Answer

When using the direct method to determine net cash flows from operating activities, adjustments must be made to interest expense to determine total interest payments. To determine total interest payments, we need to add any decreases in interest payable and subtract any increases in interest payable. This is because a decrease in interest payable implies that interest expenses were paid during the period, while an increase in interest payable suggests that interest expenses were accrued but not yet paid. Thus, the correct answer is B, which adds decreases in interest payable and subtracts increases in interest payable to determine total interest payments.

When the Direct Method Is Used to Determine the Net