Assume a company uses the indirect method to prepare its statement of cash flows. If inventory decreases and unearned revenue increases during an accounting period, what does the company do with the changes in these accounts to calculate net cash flows from operating activities?
A) Both are added to net income.
B) The change in inventory is added to net income; the change in unearned revenue is subtracted.
C) Both are subtracted from net income.
D) The change in unearned revenue is added to net income; the change in inventory is subtracted.

Question

Quizplus · Accepted Answer

A decrease in inventory indicates that less cash was used to purchase inventory, so it is added back to net income. An increase in unearned revenue means cash was received but not yet earned, so it is also added to net income.

Assume a Company Uses the Indirect Method to Prepare Its