Assume a company uses the direct method to prepare its statement of cash flows.If the company's inventory and accounts payable both increase during the accounting period,how would these changes affect cash flow calculations?
A)The changes in each account are both added to net income.
B)The change in inventory is subtracted from cost of goods sold and the change in accounts payable is added to cost of goods sold to find the cash paid to suppliers.
C)The changes in each account are both subtracted from net income.
D)The change in inventory is added to cost of goods sold and the change in accounts payable is subtracted from cost of goods sold to find the cash paid to suppliers.

Question

Quizplus · Accepted Answer

If Inventory increases,this means that more inventory was bought than was sold.If Accounts Payable increases,this means that credit payments were less than credit purchases.Therefore,to convert cost of goods sold to the amount of cash paid to suppliers,the increase in Inventory is added and the increase in Accounts Payable is subtracted.

Assume a Company Uses the Direct Method to Prepare Its