Krech Corporation's comparative balance sheet appears below: The company's net income (loss) for the year was ($3,000) and its cash dividends were $3,000. It did not sell or retire any property, plant, and equipment during the year. The company uses the indirect method to determine the net cash provided by operating activities. Which of the following is correct regarding the operating activities section of the statement of cash flows?
A)The change in Accounts Payable will be added to net income; The change in Accrued Liabilities will be subtracted from net income
B)The change in Accounts Payable will be subtracted from net income; The change in Accrued Liabilities will be added to net income
C)The change in Accounts Payable will be subtracted from net income; The change in Accrued Liabilities will be subtracted from net income
D)The change in Accounts Payable will be added to net income; The change in Accrued Liabilities will be added to net income

Question

Krech Corporation's comparative balance sheet appears below:  The company's net income (loss) for the year was ($3,000) and its cash dividends were $3,000. It did not sell or retire any property, plant, and equipment during the year. The company uses the indirect method to determine the net cash provided by operating activities. Which of the following is correct regarding the operating activities section of the statement of cash flows?
A)The change in Accounts Payable will be added to net income; The change in Accrued Liabilities will be subtracted from net income 
B)The change in Accounts Payable will be subtracted from net income; The change in Accrued Liabilities will be added to net income 
C)The change in Accounts Payable will be subtracted from net income; The change in Accrued Liabilities will be subtracted from net income 
D)The change in Accounts Payable will be added to net income; The change in Accrued Liabilities will be added to net income

Quizplus · Accepted Answer

Under the indirect method, changes in current assets and current liabilities are adjusted to net income to arrive at net cash provided by operating activities. The change in Accounts Payable (an increase in the current liability) represents a cash inflow, so it will be added to net income. The change in Accrued Liabilities (an increase in the current liability) represents a cash outflow, so it will be subtracted from net income. Choice A is the only option correctly reflecting these changes.

Krech Corporation's Comparative Balance Sheet Appears Below: the Company's