Question

Using the indirect method for reporting cash flows from operations, how should an increase in accounts payable be treated in relation to accrual-based net income?

A) Added to accrual-based net income.
B) Subtracted from accrual-based net income.
C) Ignored when calculating accrual-based net income.
D) Treated as a separate line item in the cash flow statement.

Answer 1

An increase in accounts payable is added to accrual-based net income when using the indirect method for cash flows from operations, as it reflects expenses that have been incurred but not yet paid in cash.

Step-by-step explanation:

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

This is because when accounts payable increase, it indicates that the company has incurred expenses for which it has not yet paid cash. Since the accrual-based net income includes these expenses, but the cash has not actually been paid out, adding back the increase in accounts payable adjusts the net income to reflect the actual cash flow situation.