![]() ![]() Adding back depreciation serves to remove its impact from the reporting company’s net income. To eliminate a negative, it is offset by a positive. ![]() In applying the indirect method, how are noncash items and nonoperating gains and losses removed from net income?Īnswer: Depreciation is an expense and, hence, a negative component of net income. That included depreciation expense (a noncash item) of $80,000 and a gain on the sale of equipment (an investing activity rather than an operating activity) of $40,000. Question: In the income statement presented above for the Liberto Company, net income was reported as $100,000. Adjustments are made, based on the change registered in the various connector accounts, to switch remaining revenues and expenses from accrual accounting to cash accounting.Nonoperational gains and losses are removed.After that, the three steps demonstrated previously are followed although the mechanical process here is different. How does the indirect method of reporting operating activity cash flows differ from the direct method?Īnswer: The indirect method actually follows the same set of procedures as the direct method except that it begins with net income rather than the business’s entire income statement. Instead, this information is shown within a statement of cash flows by means of the indirect method. Question: As mentioned, most organizations do not choose to present their operating activity cash flows using the direct method despite preference by FASB. Identify the reporting classification for interest revenues, dividend revenues, and interest expense in creating a statement of cash flows and describe the controversy that resulted from this handling.Determine the effect caused by the change in the various connector accounts when the indirect method is used to present cash flows from operating activities.Demonstrate the removal of noncash items and nonoperating gains and losses in the application of the indirect method.Explain the difference in the start of the operating activities section of the statement of cash flows when the indirect method is used rather than the direct method.zip file containing this book to use offline, simply click here.Īt the end of this section, students should be able to meet the following objectives: You can browse or download additional books there. More information is available on this project's attribution page.įor more information on the source of this book, or why it is available for free, please see the project's home page. Additionally, per the publisher's request, their name has been removed in some passages. However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Normally, the author and publisher would be credited here. This content was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz in an effort to preserve the availability of this book. See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and do make it available to everyone else under the same terms. This book is licensed under a Creative Commons by-nc-sa 3.0 license.
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