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 $15,000 will be subtracted from net income.
B)The decrease of $15,000 will be added to net income.
C)The decrease of $15,000 will be subtracted from cost of goods sold to determine payments to suppliers.
D)The decrease of $15,000 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 $15,000 will be subtracted from net income. 
B)The decrease of $15,000 will be added to net income. 
C)The decrease of $15,000 will be subtracted from cost of goods sold to determine payments to suppliers. 
D)The decrease of $15,000 will be added to cost of goods sold to determine payments to suppliers.

Quizplus · Accepted Answer

Under the direct method, changes in inventory are not included in the operating activities section. Instead, they are reported in the investing activities section as part of the cash flows from the acquisition of inventory. Therefore, the decrease of $15,000 related to the acquisition of inventory will not appear in the operating activities section. However, the decrease of $15,000 can be deducted from the cost of goods sold to determine the cash payments to suppliers for the purchase of inventory, which will appear in the operating activities section. Therefore, choice C is the best answer.

A Company Uses the Direct Method to Prepare the Statement