The extent to which a firm adjusts net income for changes in noncurrent assets and noncurrent liabilities in deriving cash flow from operations under the indirect method depends on the nature of its operations.Firms that decrease in size will usually show
A)additions or subtractions for losses and gains on the disposal of assets.
B)additions, only for gains on the disposal of assets.
C)subtractions, only for losses on the disposal of assets.
D)no adjustment for losses and gains on the disposal of assets.
E)none of the above

Question

Quizplus · Accepted Answer

When a firm decreases in size and disposes of assets, it typically shows both additions for losses and subtractions for gains on the disposal of assets in the cash flow from operations under the indirect method. This is because the net income is adjusted to reflect the cash effect of transactions, and gains increase net income but do not represent a cash inflow from operations, while losses decrease net income but do not represent a cash outflow from operations.

The Extent to Which a Firm Adjusts Net Income for Changes