(Appendix) When preparing a schedule for the calculation of cash generated from operating activities under the direct method, the decrease in Merchandise Inventory is
A) added to cost of goods sold.
B) added to operating expenses.
C) subtracted from cost of goods sold.
D) subtracted from operating expenses.

Question

Quizplus · Accepted Answer

When using the direct method to calculate cash generated from operating activities, the decrease in Merchandise Inventory is subtracted from cost of goods sold because it represents a use of cash. Essentially, the decrease means that less money was tied up in inventory, resulting in a lower cost of goods sold. Therefore, subtracting the decrease in Merchandise Inventory from cost of goods sold helps accurately reflect the cash flow impact of inventory changes.

(Appendix) When Preparing a Schedule for the Calculation of Cash