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
Which of the following is correct about accounts payable transaction in the operating activities category in the statement of cash flows?
A)The increase of $13,000 will be subtracted from net income.
B)The increase of $13,000 will be added to net income.
C)The increase of $13,000 will be added to purchases to determine payments to suppliers.
D)The increase of $13,000 will be subtracted from purchases 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
Which of the following is correct about accounts payable transaction in the operating activities category in the statement of cash flows?
A)The increase of $13,000 will be subtracted from net income. 
B)The increase of $13,000 will be added to net income. 
C)The increase of $13,000 will be added to purchases to determine payments to suppliers. 
D)The increase of $13,000 will be subtracted from purchases to determine payments to suppliers.

Quizplus · Accepted Answer

An increase in accounts payable indicates that the company has purchased inventory on credit and owes money to its suppliers. Therefore, the increase in accounts payable should be subtracted from purchases to determine the actual cash paid to suppliers. This adjustment will be reflected in the operating activities section of the statement of cash flows, which reports cash inflows and outflows related to the company's primary operations.

A Company Uses the Direct Method to Prepare the Statement