Inventory and accounts payable increase during the accounting period.What is done with these changes to determine the net cash flow from operating activities when the direct method is used?
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

The change in inventory is added to cost of goods sold because inventory is a component of cost of goods sold. The change in accounts payable is subtracted from cost of goods sold because accounts payable represents amounts owed to suppliers for goods that have been purchased but not yet paid for.

Inventory and Accounts Payable Increase During the Accounting Period