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The net decrease in Prepaid Expenses (Prepaid) amounts to $30,000 and the net increase in Accounts Payable (AP) is $20,000. Assuming no inventory provision involved, what is the net effect of Inv and AP 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. Prepaid Expenses, an operating asset, decreased by 30,000, so an adjustment of positive 30,000 should be made to net income. Accounts Payable, an operating liability, increased by 20,000, so an adjustment of positive 20,000 should be made to net income. The net of the two adjustments is a positive 50,000.

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