When using the indirect method to complete the cash flows from operating activities section,what is the proper treatment for an increase in the accounts receivable balance?
A) Add the increase to net income
B) Add the increase to cash collections from customers
C) Deduct the increase from net income
D) Add the increase to cash payments to suppliers

Question

Quizplus · Accepted Answer

An increase in accounts receivable means that revenue has been recognized but payment hasn't yet been received. Therefore, cash inflows are lower than the revenue recognized. Deducting the increase from net income results in adjusting the income statement for the non-cash portion of revenue recognized, which brings it to the cash basis of accounting.

When Using the Indirect Method to Complete the Cash Flows