A company uses the direct method to prepare the statement of cash flows.It presents the following data on its financial statements:

*Relates solely to the acquisition of inventory
Which of the following is correct about accounts payable transaction in the operating activities category in the statement of cash flows?
A)The increase of $10,000 will be subtracted from net income.
B)The increase of $10,000 will be added to net income.
C)The increase of $10,000 will be added to purchases to determine payments to suppliers.
D)The increase of $10,000 will be subtracted from purchases to determine payments to suppliers.

Question

A company uses the direct method to prepare the statement of cash flows.It presents the following data on its financial statements:

*Relates solely to the acquisition of inventory
Which of the following is correct about accounts payable transaction in the operating activities category in the statement of cash flows?
A)The increase of $10,000 will be subtracted from net income. 
B)The increase of $10,000 will be added to net income. 
C)The increase of $10,000 will be added to purchases to determine payments to suppliers. 
D)The increase of $10,000 will be subtracted from purchases to determine payments to suppliers.

Quizplus · Accepted Answer

Under the direct method, changes in accounts payable are used to adjust purchases to determine payments to suppliers. An increase in accounts payable means that the company has purchased more inventory on credit, and as a result, the total amount of purchases made during the period needs to be reduced by the increase in accounts payable. Therefore, the increase of $10,000 in accounts payable will be subtracted from purchases to determine payments to suppliers. This adjustment is made in the operating activities section of the statement of cash flows.

A Company Uses the Direct Method to Prepare the Statement