A company uses the direct 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 inventory?
A)The decrease of $18,000 will be subtracted from net income.
B)The decrease of $18,000 will be added to net income.
C)The decrease of $18,000 will be subtracted from cost of goods sold to determine payments to suppliers.
D)The decrease of $18,000 will be added to cost of goods sold to determine payments to suppliers.

Question

A company uses the direct 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 inventory?
A)The decrease of $18,000 will be subtracted from net income. 
B)The decrease of $18,000 will be added to net income. 
C)The decrease of $18,000 will be subtracted from cost of goods sold to determine payments to suppliers. 
D)The decrease of $18,000 will be added to cost of goods sold to determine payments to suppliers.

Quizplus · Accepted Answer

When using the direct method, changes in inventory are typically reflected in the cash outflows related to payments made to suppliers. Therefore, the decrease in inventory of $18,000 would be subtracted from the cost of goods sold to determine payments to suppliers in the operating activities section of the statement of cash flows.

A Company Uses the Direct Method to Prepare the Statement