Last year, Knox Corporation reported on its income statement sales of $375,000 and cost of goods sold of $140,000. During the year, the balance in accounts receivable increased $30,000, the balance in accounts payable decreased $25,000, and the balance in inventory increased $10,000. The company uses the direct method to determine the net cash provided by operating activities on its statement of cash flows. Under the direct method, sales adjusted to a cash basis would be:
A)$295,000
B)$345,000
C)$405,000
D)$355,000

Question

Quizplus · Accepted Answer

Under the direct method, the net cash provided by operating activities is determined by adjusting the income statement items to a cash basis.

To calculate the adjusted sales, we need to subtract the increase in accounts receivable (as this represents sales made on credit and not yet collected) and add the decrease in inventory (as this represents a cost of goods sold that has not yet been paid for):

Adjusted sales = Sales - Increase in Accounts Receivable + Decrease in Inventory
Adjusted sales = $375,000 - $30,000 + $10,000
Adjusted sales = $345,000

Therefore, the correct answer is B) $345,000.

Last Year, Knox Corporation Reported on Its Income Statement Sales