Final answer:
Aubey Aircraft's net income increase paired with a decline in net cash flow can be explained by an increase in accounts payable and depreciation expenses. These lead to higher reported net income due to accounting methods but do not immediately affect cash flow.
Step-by-step explanation:
Understanding why Aubey Aircraft's net income increased sharply but its net cash flow from operations declined requires analysis of the company's financial activities. The listed options either improve or deteriorate cash flow, so let's evaluate them:
- A decrease in accounts receivable would typically increase cash flow since it means the company is collecting more cash from its customers.
- An increase in accounts payable could temporarily boost net income because expenses are recognized at a later period but would not immediately increase cash as the company has yet to pay out these funds.
- An increase in depreciation expense is a non-cash expense and would reduce net income without affecting cash flow from operations.
- A decrease in inventory, if done by selling inventory without replacing it promptly, can increase cash flow but would not necessarily increase net income, which is adjusted for the cost of goods sold.
Thus, a possible explanation for the discrepancy if options 2 and 3 were true: increased accounts payable (more liabilities) and higher depreciation expenses leading to a higher net income due to accounting practices but lower actual cash flow due to the delay in cash outflows and the non-cash nature of depreciation.