Using the indirect method to prepare the statement of cash flows,which of the following statements is true?
A) Decrease in current assets means a decrease in cash.
B) Increase in current assets means an increase in cash.
C) Increase in current liabilities means an increase in cash.
D) Decrease in current liabilities means an increase in cash.

Question

Quizplus · Accepted Answer

An increase in current liabilities means that the company has more liabilities than it did before, which can indicate that it has received more cash (for example, through taking on more debt) without immediately spending it, thus increasing its cash position. This is a fundamental principle in the indirect method of preparing the statement of cash flows, where changes in balance sheet items are adjusted to reconcile net income to the net cash provided by operating activities.

Using the Indirect Method to Prepare the Statement of Cash