Question

On an indirect method statement of cash flows, a decrease in inventory would be:

a) reflected in the investing activities section
b) netted against any decreases in accounts payable
c) added to net income
d) deducted from net income

Answer 1

On the indirect method statement of cash flows, a decrease in inventory is added to net income, as it is considered a source of cash from operating activities and an adjustment for changes in working capital.

Step-by-step explanation:

On an indirect method statement of cash flows, a decrease in inventory would be added to net income. This is because the indirect method starts with the net income and makes adjustments to convert the total net income to a cash basis. A decrease in inventory is seen as a source of cash (since less cash is tied up in inventory), hence it would be added back to the net income figure in the operating activities section. Additionally, changes in inventory levels do not fall under investing activities, and they are not netted against accounts payable but are considered within the adjustments for changes in working capital.