13.2 Operating Activities section

Question 1

because the expenses are recorded when they are incurred, how do you need to adjust net income

Answer 1

so that expenses are recorded on the cash basis

Question 2

What adjustments are needed to net income

Answer 2

1. non cash expenses
2. losses and ganis
3. decreases in current asset accounts and increases in current liabilitiy account

Question 3

Noncash expenses- adjustments

Answer 3

When using the indirect method, adjustments to reconcile net income to net cash provided by operating activities are items that remove noncash items from net income and do not represent cash flows.

Question 4

example of non cash expenses

Answer 4

Depreciation expenses

Question 5

Are losses and gains operating activtities

Answer 5

no!!

Because these disposals usually give rise to a gain or a loss, these amounts must be removed from net income because they are not cash flows

Question 6

If a gain on disposal occurs, deduct the gain from net income when determining net cash provided (used) by operating activities. Regardless of the value of a loss and a gain resulting from the disposition of property or equipment, the actual amount of cash received from the sale is reported as a cash receipt in the investing activities section of the statement of cash flows.

Answer 6

If a gain on disposal occurs, deduct the gain from net income when determining net cash provided (used) by operating activities. Regardless of the value of a loss and a gain resulting from the disposition of property or equipment, the actual amount of cash received from the sale is reported as a cash receipt in the investing activities section of the statement of cash flows.

Question 7

4 types of chane in current asset of liability account

Answer 7

1. increase in current asset = deduct from ni
2. decrease in crurent asset= add from ni
3. increase in current liability= add from ni
4. decrease in current liability= deduct from ni

Question 8

Likewise, for expense accounts:A portion of an expense may have no effect on cash flows, but instead cause an increase in a payable, such as accounts payable or accrued liabilities. Furthermore, a portion of an expense may relate to the reduction in a prepaid expense or inventory and have no effect on cash flows. Consequently, we must eliminate these effects by adding them back to net income.Cash may also have been paid for an operating activity that did not affect an expense. This would have decreased accounts payable or increased prepaid expenses or inventory. To show that this cash was paid, we must deduct these changes from net income.

Answer 8

Likewise, for expense accounts:A portion of an expense may have no effect on cash flows, but instead cause an increase in a payable, such as accounts payable or accrued liabilities. Furthermore, a portion of an expense may relate to the reduction in a prepaid expense or inventory and have no effect on cash flows. Consequently, we must eliminate these effects by adding them back to net income.Cash may also have been paid for an operating activity that did not affect an expense. This would have decreased accounts payable or increased prepaid expenses or inventory. To show that this cash was paid, we must deduct these changes from net income.

Question 9

Notice how a change in a noncash current asset (accounts receivable, prepaid expenses, and inventory) is inversely related to its effect on operating cash flows. When a noncash current asset account increases, we report this by decreasing operating cash flows, and when these assets decrease, we report this by increasing operating cash flows.

Question 10

Notice how a change in a noncash current liability (payables and deferred revenue) is directly related to its effect on operating cash flows. When a noncash current liability account increases, we report this by increasing operating cash flows, and when this account decreases, we report this by decreasing operating cash flows.

Question 11

It’s important to recognize that not all noncash current asset and current liability (working capital) accounts affect operating activities. Some examples include:

Answer 11

The receipt and payment of short-term loans or notes receivable that have been issued for lending purposes (rather than for selling inventory, which is an operating activity). These are usually treated as investing activities.

Similarly, the receipt and repayment of short-term loans or notes payable issued for lending purposes (not issued to buy inventory, which is an operating activity) are shown in the financing section of the statement of cash flows.

Furthermore, the declaration and payment of dividends may affect the Dividends Payable account, so changes in this current liability account affect financing, not operating cash flows.

Question 12

Changes in current asset accounts

Answer 12

A.R
Inventory
prepaid expenses
trading investmnets

Question 13

changes in current liabilites

Answer 13

a.p.
i.t. payable

Question 14

noncash expenses are — to net income

Answer 14

added

Question 15

how do losses affect to net income

Answer 15

added

Question 16

how does gains affect nt income

Answer 16

deduct