The following information was taken from the operating activity section of the 2016 statement of cash flows for Limited Corp: $\begin{array}{lr}
\text { Additions to net income: Change in accounts payable } & \$ 2,000 \
\text { Deductions from net income: Change in inventories } & 8,000
\end{array}$ ? Based on the information provided, which one of the following conclusions is correct?
A) Inventories increased $8,000 in 2016.
B) The direct method was used to prepare the operating section of the cash flow statement.
C) Cash payments of merchandise exceeded cost of goods sold by $2,000.
D) Accounts payable decreased $2,000 in 2016.

Question

Quizplus · Accepted Answer

BThe increase in inventories by $8,000 indicates that inventories were added to, which is a deduction from net income in the indirect method of preparing the cash flow statement. The presence of specific adjustments for changes in accounts payable and inventories suggests the indirect method was used, not the direct method.

The Following Information Was Taken from the Operating Activity Section