Question

An increase in accounts receivable would be (added/subtracted) to (from) net income, when computing cash flows from operations using the indirect method?

1) Added to net income
2) Subtracted from net income
3) Cannot be determined
4) Not applicable

Answer 1

An increase in accounts receivable is subtracted from net income when calculating cash flows from operations using the indirect method to reflect actual cash flow rather than revenue that hasn't been collected.

Step-by-step explanation:

When computing cash flows from operations using the indirect method, an increase in accounts receivable is subtracted from net income. This adjustment is made because the increase in accounts receivable represents sales that have not yet been collected in cash, thus they inflate net income without increasing cash. Therefore, to arrive at the true cash flow from operations, this non-cash increase must be removed from the net income figure.Relevance and reliability are other attributes of audit evidence, with relevance relating to the pertinence of the evidence to the audit and reliability to the dependability of that evidence, but these do not determine the sample size. Appropriateness is a broader concept encompassing both relevance and reliability. However, it is the sufficiency of the evidence that primarily drives the decision on how many items to test. The auditor uses tools like the CRAAP test to evaluate audit evidence for attributes like relevance and reliability.