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 accounts payable?
A)The increase of $18,000 will be subtracted from net income.
B)The increase of $18,000 will be added to net income.
C)The increase of $18,000 will be added to purchases to determine payments to suppliers.
D)The increase of $18,000 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
What will appear in the operating activities section related to accounts payable?
A)The increase of $18,000 will be subtracted from net income. 
B)The increase of $18,000 will be added to net income. 
C)The increase of $18,000 will be added to purchases to determine payments to suppliers. 
D)The increase of $18,000 will be subtracted from purchases to determine payments to suppliers.

Quizplus · Accepted Answer

The increase in accounts payable will be subtracted from purchases to determine payments to suppliers. This adjustment is necessary to adjust for the change in accounts payable from the beginning to the end of the period, so that the statement of cash flows provides a true picture of the company's operating, investing, and financing activities for the period.

A Company Uses the Direct Method to Prepare the Statement