When reconciling profit with net cash flow from operating activities:
A)subtract increases in current assets and add increases in current liabilities.
B)add increases in current assets and subtract increases in current liabilities.
C)add increases in current assets and add increases in current liabilities.
D)none of the above.

Question

Quizplus · Accepted Answer

Profit can include non-cash items such as depreciation and amortization, which do not affect cash flow. Therefore, when reconciling profit with net cash flow from operating activities, we need to adjust for changes in current assets and liabilities that impact cash flow. An increase in current assets (such as accounts receivable or inventory) indicates that cash was used to purchase those assets, which would decrease net cash flow. Conversely, an increase in current liabilities (such as accounts payable or accrued expenses) indicates that cash was not yet paid out, which would increase net cash flow. Therefore, we need to subtract increases in current assets and add increases in current liabilities to arrive at the net cash flow from operating activities.

When Reconciling Profit with Net Cash Flow from Operating Activities