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 $66,000 will be subtracted from net income.
B)The increase of $66,000 will be added to net income.
C)The increase of $66,000 will be added to sales revenue.
D)The increase of $66,000 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 $66,000 will be subtracted from net income. 
B)The increase of $66,000 will be added to net income. 
C)The increase of $66,000 will be added to sales revenue. 
D)The increase of $66,000 will be subtracted from sales revenue.

Quizplus · Accepted Answer

The increase in accounts receivable indicates that the company has sold goods on credit and has yet to receive payment. Therefore, this increase is not considered cash received from operating activities. Instead, it represents an increase in revenue that is not yet collected in cash. Hence, the increase of $66,000 in accounts receivable will be subtracted from net income in the operating activities section using the indirect method.

A Company Uses the Indirect Method to Prepare the Statement