Question

When calculating net cash flows from operating activities, the change in accounts payable is subtracted from net income when accounts payable _______ during the period.

1) increases
2) decreases
3) remains constant
4) cannot be determined

Answer 1

The change in accounts payable is subtracted from net income when calculating net cash flows from operating activities if accounts payable decrease during the period, reflecting a cash outflow. The correct option is 2) decreases

Step-by-step explanation:

When calculating net cash flows from operating activities, the change in accounts payable is subtracted from net income when accounts payable decrease during the period.

This is because a decrease in accounts payable indicates that the company has paid off some of its outstanding bills, which is a cash outflow and therefore reduces the net cash provided by operating activities.

The logic here is that while net income includes expenses regardless of whether they have been paid or not, the cash flow statement adjusts for the actual cash movements. The correct option is 2) decreases