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The net decrease in Accounts Receivable (AR) amounts to $30,000 and the net decrease in Wages Payable (WP) is $20,000. Assuming no accounts were written off for lack of payment, what is the net effect of AR and WP on the adjustments to Net Income if the indirect method is used in the Statement of Cash Flows?


Correct answer. A negative (positive) adjustment to Net Income should be made for increases (decreases) in operating assets and decreases (increases) in operating liabilities. Accounts Receivable, an operating asset, decreased by 30,000, so an adjustment of positive 30,000 should be made to net income. Wages Payable, an operating liability, decreased by 20,000, so an adjustment of negative 20,000 should be made to net income. The net of the two adjustments is a positive 10,000.

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