In converting net income to net cash provided by operating activities under the indirect method:
A) decreases in accounts receivable and increases in prepaid expenses are added.
B) decreases in inventory and increases in accrued liabilities are added.
C) decreases in accounts payable and decreases in inventory are deducted.
D) increases in accounts receivable and increases in accrued liabilities are deducted.

Question

Quizplus · Accepted Answer

Decreases in inventory indicate that less cash was used to purchase inventory, which increases cash flow, and increases in accrued liabilities mean that not all expenses have been paid out in cash, which also increases cash flow. Both adjustments are added back to net income in the indirect method of cash flow calculation.

In Converting Net Income to Net Cash Provided by Operating