The comparative balance sheets of Apollo Rocket, Inc. show a net increase in inventory of $79,000 and a net decrease in accounts payable of $42,000 during 2009. In computing net cash flow from operating activities under the indirect method, net income for 2009 should be:
A) Increased by $37,000.
B) Reduced by $37,000.
C) Increased by $121,000.
D) Reduced by $121,000.

Question

Quizplus · Accepted Answer

In the indirect method, an increase in inventory is a use of cash and decreases cash flow, while a decrease in accounts payable also decreases cash flow. Therefore, net income should be reduced by the sum of these amounts: $79,000 (inventory increase) + $42,000 (accounts payable decrease) = $121,000.

The Comparative Balance Sheets of Apollo Rocket, Inc