Assume that the balance of accounts payable does not change during a period.When preparing a statement of cash flows,an increase in ending inventory over beginning inventory will result in an adjustment to net income under the indirect approach because
A)the amount of cost of goods sold is equal to the amount of cash paid for purchases.
B)consumed inventory is an expense but not a use of funds.
C)the amount of cost of goods sold on an accrual basis is less than the amount of cash paid for purchases of inventory.
D)the amount of cash paid for purchases of inventory is less than the amount of cost of goods sold on an accrual basis.

Question

Quizplus · Accepted Answer

Under the accrual basis of accounting, the cost of goods sold is calculated based on the cost of inventory consumed during the period, regardless of whether the inventory was paid for with cash or on credit. Therefore, an increase in ending inventory over beginning inventory would indicate that less inventory was consumed during the period than was purchased, resulting in a higher cost of goods sold on an accrual basis than the amount of cash paid for inventory purchases. This requires an adjustment to net income under the indirect method of preparing the statement of cash flows.

Assume That the Balance of Accounts Payable Does Not Change