Hi, My Question is this: When preparing a statement of cash flows under the indirect method, the adjustment to net income for an increase in wages payable (WP) and a decrease in the deferred tax liability (DTL) on the balance sheet compared to the prior reporting period is: answer: positive “increase in WP”, and negative “decrease in DTL” but since deferred tax expense is a non cash item, why is it being deducted when using the indirect method? Shouldn’t we add it back to Net Income just like how we treat depreciation expenses? Thanks,
wages payable is an accrued liability, increases are added. Decreasing DTLs are liabilities, deduct it. Liabilities have direct relation with cash, assets have inverse relationship with cash. Even if deferred, DTL is still considered a current liability.
GREAT question, not sure, but just to repeat the post above as far as cash flow in concerned, HIGHER ASSETS = LOWER CF and HIGHER LIABILITIES = higher cash flow think about Dell and Walmart – they throw off mountaons of cash qtr after qtr b/c they STRETCH payables and pay vendors at the LAST MINUTE. not only that, but Dell, in particular, carries LITTLE TO NO INVENTORY.
GREAT question, not sure, but just to repeat the post above as far as cash flow in concerned, HIGHER ASSETS = LOWER CF and HIGHER LIABILITIES = higher cash flow think about Dell and Walmart – they throw off mountains of cash qtr after qtr b/c they STRETCH payables and pay vendors at the LAST MINUTE. not only that, but Dell, in particular, carries LITTLE TO NO INVENTORY.