**MY QUESTION** Why is the $200 dollar difference from \'wages payable\' taken i
ID: 2437097 • Letter: #
Question
**MY QUESTION** Why is the $200 dollar difference from 'wages payable' taken into account when completing the statement of cash flows but the $13,000 spent in wages (under other expenses), does not seem to be? This appears to contradict the 'depreciation expense', which in the balance sheet amounted to $5,000 of accumulated depreciation plus $7,000 from equipment in the footnote, and thereby totaling $12,000. (In other words, the depreciation expense described in the Income Statement was $12,000 and this matched the $12,000 from the balance sheet ($5,000 plus $7,000).
Explanation / Answer
while making cash flow account , we have to calculate net cash outflow. There are two methods for cash flow : Direct & Indirect.
Under direct method, we add and less the cash amount directly. Ex. cash sales cash rec from drs, cash paid for expenses etc.
Under indirect method, we adjust income to calculate cash flows because income is calculated on accrual basis ( exp and income of current period, whether paid in cash or not).
Accordingly if we had used direct method , we will calculate wages paid in current period after giving effect of wages payable (13000+1200-1400) = 12800. It will be directly deducted.
While in Indirect method we use net income , which already had considered current year wages of 13000 ( calculated after deducting it). hence we can not deduct it twice so will will just give effect of changes in current assets or liabilities i.e. decrease in wages payable will be deducted. (1200-1400)
so in both the methods similar effect ( 13000+1200-1400) is given.
accordingly 200 $ is deducted.
But depreciation is totally non cash expense hence current year depreciation which is already deducted in net income will be added back to remove its effect.accordingly 12000 dep of current year added back.
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