The comparative balance sheets for Flagler Co.for 2017 and 2016 indicate that accounts receivable decreased during 2017.Flagler uses the indirect method of preparing the operating activities section of its statement of cash flows.How will the decrease in accounts receivable be reported on the statement of cash flows?
A) It will be included in the amount of cash and cash equivalents at the end of 2017.
B) It will be deducted from net income in the operating activities section.
C) It will be added to net income in the operating activities section.
D) It will be reported as a cash outflow in the investing activities section.

Question

Quizplus · Accepted Answer

The decrease in accounts receivable will be reported as an increase in cash in the operating activities section of the statement of cash flows using the indirect method. This is because a decrease in accounts receivable indicates that more cash was collected from customers than was previously expected, resulting in an increase in cash flows from operating activities. The option of deducting the decrease from net income (Choice B) is incorrect as this would result in a lower net income figure which is not accurate. Reporting the decrease in accounts receivable as a cash outflow in the investing activities section (Choice D) is also incorrect as it does not reflect the true nature of the transaction. Choice A is also incorrect as it only reflects the ending balance of cash and not the change in cash during the period.

The Comparative Balance Sheets for Flagler Co