Question

Which of the following should be added to net income in calculating net cash flow from operating activities using the indirect method?

Select one:

a. an increase in accounts payable

b. a decrease in accounts payable

c. preferred dividends declared and paid

d. an increase in inventory

During 2019, the board of directors declared cash dividends of $625,000. The comparative balance sheets indicate that dividends payable were $24,000 on January 1, 2019 and were at $17,500 on December 31, 2019. What amount of cash was paid to stockholders during 2019? (Hint: A T-account would probably help you to visualize this)

Select one:

a. $642,500

b. $625,000

c. $649,000

d. $631,500

Which of the following should be added to net income in calculating net cash flow from operating activities using the indirect method?

Select one:

a. an increase in accrued liabilities

b. a decrease in accounts payable

c. dividends paid on common stock

d. a gain on the sale of land

Answer 1

Solution:

1)

Cash Flow from Operating Activities means flow of Cash and Cash Equivalents from principal revenue generating activities and incidental items.

For example:

• Cash Collected from Debtors
• Cash paid for Creditors
• Cash paid for expenses

Notes:

1. Payment of Income tax is considered to be cash flow from operating activities (incidental terms).

An increase accounts payable shows the cash is with the business and do not out from business. Hence Increase in Accounts Payable should be added to Net Income in calculating net cash flow from operating activities using the indirect method

The correct option is a. an increase in accounts payable

2)

Dividends Payable
Dividend Paid during year (Balancing Figure)	$631,500	Beg. Bal	$24,000
		Declared during year	$625,000
Ending Bal	$17,500
	$649,000		$649,000

Hence, the dividends paid to stockholders during the year 2019 = $631,500

The correct option is d. $631,500

3)

An increase in accrued liabilities shows that the cash remains with the business only liability increase. It means Cash Flow is increasing Hence it is added to Net Income in calculating net cash flow from operating activities using the indirect method.

The correct option is a. an increase in accrued liabilities

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you