When using the indirect method,a decrease in a current asset (other than cash or cash equivalents)is:
A) subtracted from current liabilities in the cash flows from financing activities section.
B) subtracted from net income in the cash flows from operating activities section.
C) added to net income in the cash flows from operating activities section.
D) added in the cash flows from investing activities section.

Question

Quizplus · Accepted Answer

When using the indirect method of cash flow statement, a decrease in a current asset (other than cash or cash equivalents) should be added to net income in the cash flows from operating activities section. This is because a decrease in a current asset (non-cash nature) means that it generated cash (e.g., sale of inventory) and has increased the operating cash flow. Therefore, the net income should be adjusted by adding the decrease in current assets to arrive at the operating cash flows.

When Using the Indirect Method,a Decrease in a Current Asset