Question

Using the indirect method for reporting cash flows from operations, should an increase in accounts receivable be added to or subtracted from accrual based net income?

A) Added to

B) Subtracted from

C) No adjustment needed

D) Depends on the magnitude of increase

Answer 1

The correct option is B). An increase in accounts receivable should be subtracted from accrual-based net income when using the indirect method for reporting cash flows from operations in business financial reporting.

Step-by-step explanation:

When using the indirect method for reporting cash flows from operations, an increase in accounts receivable should be subtracted from accrual-based net income.

This is because an increase in accounts receivable indicates that sales have been made on credit and cash has not been received yet.

Since net income is calculated on an accrual basis, it includes revenue that has been recognized but not yet received in cash. Therefore, subtracting the increase in accounts receivable from net income helps to adjust for the portion of revenue that hasn't been collected in cash.