If a company uses the indirect method to prepare the statement of cash flows, how will the adjustment to reflect the amount of cash received from customers be presented on the statement?
A)The adjustment will be for the increase or decrease in inventory during the period and will adjust net income in the operating activities section on the statement of cash flows.
B)The adjustment will be for the increase or decrease in accounts payable during the period and will adjust net income in the operating activities section on the statement of cash flows.
C)The adjustment will be for the increase or decrease in accrued expenses during the period and will adjust net income in the operating activities section on the statement of cash flows.
D)The adjustment will be for the increase or decrease in accounts receivable during the period and will adjust net income in the operating activities section on the statement of cash flows.

Question

Quizplus · Accepted Answer

The adjustment to reflect the amount of cash received from customers will be for the increase or decrease in accounts receivable during the period and will adjust net income in the operating activities section on the statement of cash flows. This is because the indirect method starts with net income, which includes revenues earned but not necessarily received in cash. The adjustment for changes in accounts receivable reflects the fact that if accounts receivable is increasing, then revenue was earned but cash was not received, and if accounts receivable is decreasing, then cash was received but revenue was not earned.

If a Company Uses the Indirect Method to Prepare the Statement