A company uses the indirect method to prepare the statement of cash flows.It presents the following data on its financial statements:

*Relates solely to the acquisition of inventory
What will appear in the operating activities section related to accounts receivable?
A)The increase of $15,000 will be subtracted from net income.
B)The increase of $15,000 will be added to net income.
C)The increase of $15,000 will be added to sales revenue.
D)The increase of $15,000 will be subtracted from sales revenue.

Question

A company uses the indirect method to prepare the statement of cash flows.It presents the following data on its financial statements:

*Relates solely to the acquisition of inventory
What will appear in the operating activities section related to accounts receivable?
A)The increase of $15,000 will be subtracted from net income. 
B)The increase of $15,000 will be added to net income. 
C)The increase of $15,000 will be added to sales revenue. 
D)The increase of $15,000 will be subtracted from sales revenue.

Quizplus · Accepted Answer

The increase in accounts receivable represents an outflow of cash, since the company has not yet collected payment for sales made on credit. Therefore, it should be subtracted from net income in the operating activities section.

A Company Uses the Indirect Method to Prepare the Statement