An increase in the Inventory account from $10,000 at the beginning of the year to $15,000 at the end of the year would be shown on the statement of cash flows prepared under the indirect method as:
A) an addition to net income of $5,000 in order to arrive at net cash provided by operating activities.
B) a deduction from net income of $5,000 in order to arrive at net cash provided by operating activities.
C) an addition to net income of $15,000 in order to arrive at net cash provided by operating activities.
D) a deduction from net income of $10,000 in order to arrive at net cash provided by operating activities.

Question

Quizplus · Accepted Answer

An increase in the Inventory account represents cash that has been used to purchase additional inventory, which is not an expense in the period. Therefore, it is deducted from net income in order to arrive at the net cash provided by operating activities. In this case, the increase in inventory is $5,000 ($15,000 – $10,000), which is deducted from net income in the statement of cash flows prepared under the indirect method. Therefore, choice B is the correct answer.

An Increase in the Inventory Account from $10,000 at the Beginning