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 inventory in the operating activities category of the cash flow statement?
A)The decrease of $25,000 will be subtracted from net income.
B)The decrease of $25,000 will be added to net income.
C)The decrease of $25,000 will be subtracted from cost of goods sold to determine payments to suppliers.
D)The decrease of $25,000 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
Which of the following is correct about inventory in the operating activities category of the cash flow statement?
A)The decrease of $25,000 will be subtracted from net income. 
B)The decrease of $25,000 will be added to net income. 
C)The decrease of $25,000 will be subtracted from cost of goods sold to determine payments to suppliers. 
D)The decrease of $25,000 will be added to cost of goods sold to determine payments to suppliers.

Quizplus · Accepted Answer

Under the direct method of preparing the statement of cash flows, changes in inventory are presented in the operating activities section. A decrease in inventory indicates that inventory has been sold or used up during the period, which would have reduced the cost of goods sold (COGS). Therefore, the decrease of $25,000 will be subtracted from the COGS to determine the payments to suppliers, which will be reported in the cash flow statement as part of the operating activities. It will not be added or subtracted from net income.

A Company Uses the Direct Method to Prepare the Statement