Brighton,Inc.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 $10,000 and its Accounts Payable decreased by $5,000.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 $5,000.
B) addition of $5,000.
C) addition of $15,000.
D) subtraction of $15,000.

Question

Quizplus · Accepted Answer

Under the indirect method, an increase in accounts receivable is considered a use of cash and a decrease in accounts payable is considered a source of cash. Therefore, the increase in accounts receivable of $10,000 will be subtracted, and the decrease in accounts payable of $5,000 will be added. The combined effect will be a subtraction of $5,000 ($10,000 - $5,000) resulting in a decrease in net cash provided by operating activities of $5,000.