Assume the indirect method is used to compute net cash flows from operating activities.For this item extracted from the financial statements-Decrease in Accounts Receivable-indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following:
A)Add to net income to arrive at net cash flows from operating activities.
B)Subtract from net income to arrive at net cash flows from operating activities.
C)Not used to adjust net income to calculate net cash flows from operating activities.

Question

Quizplus · Accepted Answer

A decrease in accounts receivable means that the company has received payment for some of its sales made on credit, which should be added back to the net income to arrive at the net cash flows from operating activities under the indirect method. This is because the decrease in accounts receivable did not reflect a cash expense, but rather a decrease in the amount of cash tied up in accounts receivable.

Assume the Indirect Method Is Used to Compute Net Cash