Identify the working capital accounts related to (a) revenues
recognized and deferred, (b) cost of goods sold, (c) employee salary and wages, and (d)
income tax expense. For each account, indicate whether an increase in the working capital
asset or liability would be an addition or subtraction when reconciling from net income to
cash flows from operations.
To identify the working capital accounts related to the given items, we will break down each one:
(a) Revenues Recognized and Deferred:
The working capital account related to revenues recognized and deferred is typically called "Accounts Receivable." When revenues are recognized but not yet received in cash, they are recorded as accounts receivable. An increase in accounts receivable represents an increase in the working capital asset, as it implies an increase in the amount of cash to be received in the future.
(b) Cost of Goods Sold:
The working capital account related to the cost of goods sold is the "Inventory" account. Inventory represents the value of goods held for sale and not yet sold. An increase in inventory would be considered an addition when reconciling from net income to cash flows from operations because it implies that more cash has been used to purchase inventory.
(c) Employee Salary and Wages:
The working capital account related to employee salary and wages is the "Accounts Payable" account. Accounts payable represents the amount owed to employees for their wages or salaries that have not yet been paid. An increase in accounts payable would be considered a subtraction when reconciling from net income to cash flows from operations because it implies that less cash has been used to pay salaries and wages.
(d) Income Tax Expense:
The working capital account related to income tax expense is the "Income Tax Payable" account. Income tax payable represents the amount of taxes owed to the government but not yet paid. An increase in income tax payable would be considered a subtraction when reconciling from net income to cash flows from operations because it implies that less cash has been used to pay income taxes.
To summarize:
- Accounts Receivable: Increase in working capital asset (addition)
- Inventory: Increase in working capital asset (addition)
- Accounts Payable: Increase in working capital liability (subtraction)
- Income Tax Payable: Increase in working capital liability (subtraction)
Please note that these categorizations are general and may vary depending on specific accounting practices and organizational structures.