When reconciling profit with net cash flow from operating activities:
A)subtract increases in current assets and add increases in current liabilities.
B)add increases in current assets and subtract increases in current liabilities.
C)add increases in current assets and add increases in current liabilities.
D)None of the above

Question

Quizplus · Accepted Answer

When reconciling profit with net cash flow from operating activities, we need to adjust for changes in current assets and liabilities. An increase in current assets (such as accounts receivable or inventory) means that cash was used to purchase these assets and therefore needs to be subtracted from profit. Conversely, an increase in current liabilities (such as accounts payable or accrued expenses) means that cash was received but not yet paid out, and therefore needs to be added back to profit. So, we need to subtract increases in current assets and add increases in current liabilities to reconcile profit with net cash flow from operating activities. Option A correctly identifies this process.

When Reconciling Profit with Net Cash Flow from Operating Activities