@ CPA10 Generally increases in Assets should be subtracted from Beginning Net Income.
AN Increase in Accounts Receivable means that you accrued more revenue than you collect, which means that you have accrued revenue in your net income, but you have not gotten paid for it yet. So must be subtracted, because it is not an inflow of cash. A decrease in AR is treated as an addition.
An increase in inventory should be subtracted because you used cash for items that have yet to flow through to the income statement. So they were not counted as an expense yet.
An increase in prepaid expense should be subtracted because you used cash to pay for something that has not flowed through to the Income Statement yet. If prepaid expense decreased, then it should be added back because your recognizing an expense that did not use cash in your current Net Income.
Depreciation expense is always added back because is a non cash expense. Generally when something is a non cash expense, it should be added back.
Increases in accounts payable should be added back. You have accrued expenses in net income that have not been paid yet, so they represent non cash expenses. Decreases in accounts payable should be subtracted. You paid bills accrued from the previous year, because these were accrued from the prior year, the expenses are not currently recorded in your current income statement.
Just examples and reasoning behind each.
FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.
.