The comparative statements of financial position of Friends, Inc. show a net increase in accounts receivable of $650 and a net decrease in inventory of $500. To determine net cash from operating activities under the indirect method, profit for the year should be:
A) Reduced by $650.
B) Increased by $650.
C) Reduced by $150.
D) Increased by $150.

Question

Quizplus · Accepted Answer

Under the indirect method, net cash from operating activities is calculated by starting with net income and making adjustments for non-cash transactions and changes in current assets and liabilities. The increase in accounts receivable indicates that revenue was recognized but not yet received in cash, so it should be subtracted from net income. The decrease in inventory indicates that inventory was sold, so cost of goods sold (which is already subtracted from revenue in net income) should be reduced by the amount of the decrease in inventory. Therefore, net income should be reduced by $650 (accounts receivable) and increased by $500 (decrease in inventory). The overall effect is a reduction of $150, so the correct answer is C.

The Comparative Statements of Financial Position of Friends, Inc