The most recent comparative balance sheet of Giacomelli Corporation appears below: The company uses the indirect method to construct the operating activities section of its statement of cash flows.Which of the following is correct regarding the operating activities section of the statement of cash flows?
A) The change in Accounts Receivable will be subtracted from net income; The change in Inventory will be added to net income
B) The change in Accounts Receivable will be added to net income; The change in Inventory will be subtracted from net income
C) The change in Accounts Receivable will be added to net income; The change in Inventory will be added to net income
D) The change in Accounts Receivable will be subtracted from net income; The change in Inventory will be subtracted from net income

Question

The most recent comparative balance sheet of Giacomelli Corporation appears below:  The company uses the indirect method to construct the operating activities section of its statement of cash flows.Which of the following is correct regarding the operating activities section of the statement of cash flows?
A) The change in Accounts Receivable will be subtracted from net income; The change in Inventory will be added to net income 
B) The change in Accounts Receivable will be added to net income; The change in Inventory will be subtracted from net income 
C) The change in Accounts Receivable will be added to net income; The change in Inventory will be added to net income 
D) The change in Accounts Receivable will be subtracted from net income; The change in Inventory will be subtracted from net income

Quizplus · Accepted Answer

According to the indirect method, the change in accounts receivable will be added to net income as a decrease in accounts receivable increases cash flow. Conversely, the change in inventory will be subtracted from net income as an increase in inventory ties up cash flow. Therefore, the correct answer is B, where the change in accounts receivable will be added to net income, and the change in inventory will be subtracted from net income.

The Most Recent Comparative Balance Sheet of Giacomelli Corporation Appears