Question

Excel Tractors Inc. S opening inventory was $50,000 and the inventory at the end of the year was $65,000. How will this information affect the cash flow statement (indirect method)?

А. Difference of $15,000 will be deducted from net income



B. Difference of $15,000 will be added to net income



C. Opening inventory of


$50,000 will be added to net income



D. Closing inventory of $65,000 will be deducted from net income



E. Closing inventory of $65,000 will be added to net income

Answer 1

When preparing a cash flow statement using the indirect method, changes in inventory can have an impact on the cash from operating activities section. An increase in inventory indicates that more cash has been used (cash outflow) to purchase additional inventory.

In this case, the inventory increased by $15,000 ($65,000 - $50,000), indicating that Excel Tractors Inc. invested more cash into inventory. In the indirect method of preparing a cash flow statement, an increase in inventory is considered a use of cash, and thus it is deducted from net income.

Therefore, the correct answer is:

A. Difference of $15,000 will be deducted from net income.