During Year 9, Hart Motors Corp.had a net $100,000 decrease in Warranties Payable.The T-account work sheet for preparing the statement of cash flows
A)adds this decrease in Warranties Payable so that cash flow from operations reports cash expenditures, not expenses.
B)subtracts this decrease in Warranties Payable so that cash flow from operations reports cash expenditures, not expenses.
C)adds this decrease in Warranties Payable so that cash flow from operations reports cash expenses, not expenditures.
D)subtracts this decrease in Warranties Payable so that cash flow from operations reports cash expenses, not expenditures.
E)subtracts this decrease in Warranties Payable so that cash flow from financing reports cash expenses, not expenditures.

Question

Quizplus · Accepted Answer

The decrease in Warranties Payable represents a decrease in liabilities, not a cash expense. Therefore, it needs to be subtracted from net income when calculating cash flow from operations so that it is not counted as an expense. This ensures that cash flow from operations only reports cash expenditures, which is the purpose of the statement of cash flows.