A company uses the indirect method to prepare the statement of cash flows.It presents the following data on its financial statements:

*Relates solely to the acquisition of inventory
What will appear in the operating activities section related to salary payable?
A)The decrease of $3,000 will be added to net income.
B)The decrease of $3,000 will be added to cost of goods sold.
C)The decrease of $3,000 will be subtracted from cost of goods sold.
D)The decrease of $3,000 will be subtracted from net income.

Question

A company uses the indirect method to prepare the statement of cash flows.It presents the following data on its financial statements:

*Relates solely to the acquisition of inventory
What will appear in the operating activities section related to salary payable?
A)The decrease of $3,000 will be added to net income. 
B)The decrease of $3,000 will be added to cost of goods sold. 
C)The decrease of $3,000 will be subtracted from cost of goods sold. 
D)The decrease of $3,000 will be subtracted from net income.

Quizplus · Accepted Answer

Salary payable is a liability account and is related to operating expenses. A decrease in the amount of the liability means that the company paid off some of its salary payable during the period, which is a use of cash in the operating activities section. Therefore, the decrease of $3,000 will be subtracted from net income in the operating activities section.

A Company Uses the Indirect Method to Prepare the Statement