Utah Corp.uses the indirect method to prepare the statement of cash flows.Refer to the following section of the comparative balance sheet: How will the change in Merchandise Inventory be shown on the statement of cash flows?
A)addition to net income under the operating activities section
B)subtraction from net income under the operating activities section
C)positive cash flow under the financing activities section
D)negative cash flow under the investing activities section

Question

Utah Corp.uses the indirect method to prepare the statement of cash flows.Refer to the following section of the comparative balance sheet:  How will the change in Merchandise Inventory be shown on the statement of cash flows?
A)addition to net income under the operating activities section 
B)subtraction from net income under the operating activities section 
C)positive cash flow under the financing activities section 
D)negative cash flow under the investing activities section

Quizplus · Accepted Answer

The change in Merchandise Inventory will be shown as a subtraction from net income under the operating activities section in the statement of cash flows. This is because the change in inventory affects the cash flows from operating activities, specifically the cash flows from operating activities related to changes in working capital. A decrease in inventory would imply that more goods have been sold, which would increase net income. However, this increase in net income does not represent an actual cash inflow because the goods have not been sold for cash yet. Therefore, the decrease in inventory needs to be subtracted from net income to arrive at the actual cash inflow from operating activities.

Utah CorpUses the Indirect Method to Prepare the Statement of Cash