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
What will appear in the operating activities section related to accounts payable?
A)The increase of $15,000 will be subtracted from net income.
B)The increase of $15,000 will be added to net income.
C)The increase of $15,000 will be added to purchases to determine payments to suppliers.
D)The increase of $15,000 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
What will appear in the operating activities section related to accounts payable?
A)The increase of $15,000 will be subtracted from net income. 
B)The increase of $15,000 will be added to net income. 
C)The increase of $15,000 will be added to purchases to determine payments to suppliers. 
D)The increase of $15,000 will be subtracted from purchases to determine payments to suppliers.

Quizplus · Accepted Answer

Under the direct method of preparing the statement of cash flows, changes in accounts payable are adjusted for in the purchases to determine payments to suppliers. Therefore, the increase in accounts payable of $15,000 will be subtracted from purchases to determine payments to suppliers, and will appear as a deduction in the operating activities section.

A Company Uses the Direct Method to Prepare the Statement