ADJUSTMENT = SUBTRACT GAINS ON THE DISPOSAL OF ASSETS. Proceeds from the sale of fixed assets are an investing cash flow. Since gains a portion of such proceeds, we need to subtract them from net income in calculating CFO under the indirect method. Conversely a loss would be added back to net income in calculating CFO under the indirect method
Why is a loss added back to net income?
Because the indirect method starts with net income, losses have already been included in the calculation. I think…
Also… Increase in accounts payable. why would this be added on?
I get why if inventory increases, you subtract, because that means you spent more cash to buy that inventory.
Decrease in wages payable is also a subtraction, because you used cash to pay your works.
An increase in wages payable would be an addition? How does that work in terms of cash flowing?
Not to sure of the mechanics but think of it like this: because its is an accounts payable. I.e, no money has not yet left the account yet, it is sitting their waiting to be used in the future. Therefore you still have that in your account and should add it. Not to sure if this is correct, but it will help you to remeber what to do with it in the exam…
I will take a stab, not sure how correct it is though:
You add back the losses because they are not an operating cash flow but were already taken out to get Net Income
If wages payable increases, you are paying out less cash to your employees so cash flow should be higher.
Ending Wages Payable = Beginning Wages Payable + Wage Expense - Cash Paid to Employees
If ending wages payable increases, you know that your wage expense was higher (decreasing net income) than the cash you paid out, causing you to have to add back the increase in payables to get CFO.
For the indirect method, I remember it like this:
Asset Increases : Subtract Change
Asset Decreases : Add Change
Liability Increases : Add Change
Liability Decreases : Subtract Change