Question

Q 5.14: When calculating cash provided by operations in the statement of cash flows using the indirect method, how would an increase in Accounts Receivable and an increase in Accounts Payable be handled

Answer 1

Accounts Receivable would be deducted from net income and Accounts Payable would be added to net income.

Explanation:

The statement of cash flows indicate the cash inflows and outflows for a company over a particular period of time from operating, investing, and financing activities.

Realization concept of accounting posits that revenue can only be recognized after it has been earned. Hence, an increase in Accounts Receivable would be deducted from net income and this will reduce the net income, in the same vein an increase in Accounts Payable would be added to net income.

It is pertinent to understand that revenue can be realized only when it is earned.