Question

Which of the following current assets is included in the adjustment of net income to obtain cash flow from operating activities?

1) Inventory.
2) Prepaid expenses.
3) Accounts receivable.
4) All of the above.

Answer 1

All current assets listed – Inventory, Prepaid expenses, and Accounts receivable – are included in the adjustments of net income to calculate cash flow from operating activities. These adjustments reflect changes in the assets that have an impact on the company's cash flow.

Step-by-step explanation:

The question is asking which of the following current assets are included in the adjustment of net income to obtain cash flow from operating activities: Inventory, Prepaid expenses, or Accounts receivable. The correct answer is 4) All of the above. When adjusting net income to calculate cash flow from operating activities, changes in current assets such as Inventory, Prepaid expenses, and Accounts receivable are considered. An increase in inventory or prepaid expenses is subtracted from net income, whereas an increase in accounts receivable is added (and vice versa for decreases).

For example, if a company's inventory increases, it means that the company has bought more goods, which hasn't yet resulted in an actual cash outflow. Similarly, if prepaid expenses increase, it indicates that the company has paid for services that it will receive in the future. Changes in accounts receivable reflect the cash that is expected to be collected from customers. If accounts receivable increase, the company has made sales for which it has not yet received cash.