13 When computing net cash flow from operating activities using the indirect method, an addition to net income is most likely to occur when there is a:
A gain on the sale of an asset.
B loss on the retirement of debt.
C decrease in a deferred tax liability.
Can someone explain me what is the right answer and why the others are wrong? I really need a in-depth explanation for this one.
Gain on sale of asset fetches you cash. However, that cash is not generated from operating activity. The net income already reflects this gain. Therefore, this must be deducted from net income to arrive at operating cash flow. Because the questions ask you to pick an item that needs to be added to the Net income, this option is ruled out.
Loss on retirement of debts reduces the Net income. However, this loss is not because of operating activity. Therefore, while arriving at the cash generated from operating activity, this amount needs to be added back. Option B is the correct answer to the question.
Deferred tax is used to record the difference between income tax as per accounting books and tax records. The decrease in DTL is subtracted from net income, just like how we treat a decrease in other liabilities.
Hope this helps!