Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

3. Accrual Accounting Concepts

Adjusting Entries: Accrued Expenses

Financial Accounting

3. Accrual Accounting Concepts

Adjusting Entries: Accrued Expenses

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Multiple Choice

Which of the following adjustments to net income is made when calculating operating cash flows under the indirect method for accrued expenses?

Add decreases in accrued expenses to net income

Ignore changes in accrued expenses when calculating operating cash flows

Add increases in accrued expenses to net income

Subtract increases in accrued expenses from net income

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Verified step by step guidance

Understand the indirect method for calculating operating cash flows: This method starts with net income and adjusts for non-cash items and changes in working capital accounts, such as accrued expenses.

Recognize that accrued expenses represent liabilities that have been incurred but not yet paid. An increase in accrued expenses means the company has recorded an expense but has not yet used cash to settle it.

When accrued expenses increase, it implies that the company has retained cash that would otherwise have been used to pay these expenses. Therefore, the increase in accrued expenses is added back to net income to reflect the cash retained.

If accrued expenses decrease, it means the company has paid off some of its liabilities, reducing cash. In this case, the decrease in accrued expenses is subtracted from net income to account for the cash outflow.

Apply this understanding to the problem: The correct adjustment under the indirect method for accrued expenses is to add increases in accrued expenses to net income, as this reflects cash retained by the company.