Question

Questions in Accounting.

1. Choose an adjustment from the Operating Activities section using the indirect method and explain why you would increase or decrease net income to arrive at cash.

2. What are noncash activities? Where are they reported?

Answer 1

1) Adjustment related to the depreciation of the assets will be reduced from the net income as it is a non cash activity. depreciation expense is already deducted from the net income derived from the profit and loss account it. The cash flow statements start with the net income which includes depreciation expense, now as a depreciation expense is a non cash activities therefore it is added back to the net income so as to arrive at adjusted net income which consists of only cash activities and do not consist any of the non cash activities.

Therefore as the depreciation expense is already added in the expense account it in the profit and loss statement which reduces the net income so it will be added back to the net income to arrive at adjusted operating.

2) Non cash activities are those activities which do not alter the cash balance. it can also be said that non cash activities are normal book entries which are not paid or received in actual cash. For example depreciation expenses a non cash activity because there is no actual outflow of the cash which reduces the book value of the asset but as per the accounting policy a certain amount of percent is to be reduced from the asset in the name of depreciation which is treated as expense in the profit and loss account and thus reducing the the net income.

Such non cash activities are to be shown in the profit and loss statement. If activity is a type of expense then it will be debited in the profit and loss statement and if it is an income then it will be added to the profit and loss statement at credit side.

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