When using the direct method to prepare the statement of cash flows,two adjustments must be made to cost of goods sold to calculate cash paid to suppliers.Which of the following correctly explains the two adjustments?
A)Decreases in inventory are added to cost of goods sold and decreases in accounts payable are added to cost of goods sold.
B)Increases in inventory are added to cost of goods sold and increases in accounts payable are deducted from cost of goods sold.
C)Increases in inventory are deducted from cost of goods sold and increases in accounts payable are deducted from cost of goods sold.
D)Decreases in inventory are deducted from cost of goods sold and decreases in accounts payable are deducted from cost of goods sold.
E)None of the answer choices is correct.

Question

Quizplus · Accepted Answer

When using the direct method to prepare the statement of cash flows, two adjustments must be made to cost of goods sold to calculate cash paid to suppliers. The adjustments are as follows:
1. Increases in inventory are added to cost of goods sold, as inventory is a use of cash.
2. Increases in accounts payable are deducted from cost of goods sold, as accounts payable represent a source of cash.

When Using the Direct Method to Prepare the Statement of Cash