Question

Excerpts from Neuwirth Corporation's comparative balance sheet appear below: Ending Balance Beginning Balance Cash and cash equivalents $ 37,000 $ 27,000 Accounts receivable $ 24,000 $ 28,000 Inventory $ 65,000 $ 68,000 Which of the following is the correct treatment within the operating activities section of the statement of cash flows using the indirect method?

Answer 1

The correct treatment in the cash flow statement using the indirect method includes subtracting a decrease in accounts receivable, adding a decrease in inventory, and recognizing the increase in cash.

Step-by-step explanation:

The student question pertains to the preparation of the cash flow statement using the indirect method, part of financial reporting which falls under the subject of business or accounting. When using the indirect method for the operating activities section, adjustments are made to net income to convert it from the accrual basis of accounting to the cash basis.

The correct treatment in this case would be to:

• Subtract the decrease in accounts receivable ($4,000) from net income. This is because when accounts receivable decrease, it implies that cash has been received.
• Add the decrease in inventory ($3,000) to net income. A decrease in inventory indicates that inventory has been sold, and assuming it was sold on credit, it increases net income on an accrual basis, but not cash until the receivables are collected.
• Add the increase in cash ($10,000) to net income. This is a direct reflection of the cash position and hence, it’s already a cash-based figure.

Answer 2

The change in Accounts Receivable is added to net income; The change in Inventory is added to net income.

Step-by-step explanation:

Account receivable:

= Ending balance - Beginning balance

= 24,000 - 28,000

= -4,000

Decrease in account receivable

Inventory:

= Ending balance - Beginning balance

= 65,000 - 68,000

= -3,000

Decrease in inventory

Since the Current assets have decreased therefore they should be added to net income.

The change in Accounts Receivable is added to net income; The change in Inventory is added to net income.

Note: The options are missing from the question, so i have attached the options with the answer.