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

*Relates solely to the acquisition of inventory
Which of the following is correct about the accounts receivable in the operating activities category in the statement of cash flows?
A)The increase of $15,000 will be subtracted from net income.
B)The increase of $15,000 will be subtracted from sales to determine cash received from customers.
C)The increase of $15,000 will be added to sales to determine cash received from customers.
D)The increase of $15,000 will be added to net income.

Question

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

*Relates solely to the acquisition of inventory
Which of the following is correct about the accounts receivable in the operating activities category in the statement of cash flows?
A)The increase of $15,000 will be subtracted from net income. 
B)The increase of $15,000 will be subtracted from sales to determine cash received from customers. 
C)The increase of $15,000 will be added to sales to determine cash received from customers. 
D)The increase of $15,000 will be added to net income.

Quizplus · Accepted Answer

The increase in accounts receivable indicates that sales have been made on credit and cash has not been received yet. Therefore, the increase in accounts receivable needs to be subtracted from sales to determine the cash received from customers, as indicated by option B. Option A and D are incorrect because the increase in accounts receivable does not directly impact net income, and adding the increase to net income would overstate the amount of cash received. Option C is incorrect because adding the increase in accounts receivable to sales would overstate the amount of cash received.

A Company Uses the Direct Method to Prepare the Statement