When preparing a reconciliation of net income to cash from operations, an increase in the ending inventory over the beginning inventory will result in an adjustment to reported net income because:
A) Cash is increased because inventory is a current asset.
B) Inventory is an expense deducted in computing net earnings, but is not a use of cash.
C) The net increase in inventory is part of the difference between cost of goods sold and cash paid to suppliers.
D) All changes in noncash accounts must be disclosed.

Question

Quizplus · Accepted Answer

The net increase in inventory indicates that the company has more inventory at the end of the period than at the beginning, which means it has purchased more inventory than it has sold (in terms of cost of goods sold). This difference is part of reconciling the cost of goods sold with the actual cash paid to suppliers, as the increase in inventory represents cash outflow not reflected in the net income calculation.

When Preparing a Reconciliation of Net Income to Cash from Operations