Question

What is the net adjustment to net income with respect to the determination of cash flows from operating activities when inventory decreases $125,000 and accounts payable decreases $32,500?

Answer 1

When calculating cash flows from operating activities, a decrease in inventory of $125,000 is added to net income, and a decrease in accounts payable of $32,500 is subtracted. The net adjustment to net income is $92,500 added.

Step-by-step explanation:

When determining cash flows from operating activities, adjustments are made to the net income for changes in working capital accounts on the balance sheet. A decrease in inventory is considered a source of cash because it means the company has sold inventory without needing to replace it, thus not spending cash.

Therefore, if inventory decreases by $125,000, this amount would be added to the net income. Conversely, a decrease in accounts payable indicates that the company has used cash to pay off its creditors, which is a use of cash. Hence, the decrease in accounts payable of $32,500 would be subtracted from the net income.

In summary, the net adjustment to net income for the cash flows from operating activities would be the addition of $125,000 due to the decrease in inventory and the subtraction of $32,500 due to the decrease in accounts payable. The overall net adjustment would thus be $125,000 - $32,500 = $92,500 added to the net income to arrive at the cash flows from operating activities.