Question

On an indirect method statement of cash flows, an increase in accounts payable would be:

a) Added to net income
b) Deducted from net income
c) Reflected in the Investing Activities section
d) Netted against any decreases in accounts receivable

Answer 1

In the indirect method of statement of cash flows, an increase in accounts payable is added to net income as it signifies that the company owes more money, which means it has not yet paid out cash.

Step-by-step explanation:

On an indirect method statement of cash flows, an increase in accounts payable would be added to net income. This is because the indirect method starts with net income and then adjusts for changes in balance sheet accounts that affect cash. An increase in accounts payable signifies that the company has more cash because it has not yet paid out the funds despite recognizing the expense. Thus, when preparing the statement of cash flows, this increase in accounts payable is added back to net income in the operating activities section.