Bailey Hill Co.uses the indirect method to determine its net cash flows from operating activities.During the course of the year,the company's Accounts Receivable increased by $28,000 and its Accounts Payable decreased by $14,000.If these are the only two adjustments required to convert net income to net cash provided by operating activities,the combined effect will be a(n):
A)subtraction of $14,000.
B)addition of $14,000.
C)addition of $42,000.
D)subtraction of $42,000.

Question

Quizplus · Accepted Answer

An increase in Accounts Receivable implies that cash collections were less than sales on account.To convert from the higher credit sales number that is included in net income to the lower amount of cash collected from customers,we subtract the $28,000 increase in Accounts Receivable from net income to calculate cash flows from operating activities.A decrease in Accounts Payable means that purchases on account were less than the cash payments to suppliers.Thus,to show the higher cash outflow,we also subtract the $14,000 decrease in Accounts Payable from net income to calculate cash flows from operating activities.