Which combination is the appropriate operation to perform to the following accounts to reconcile net profit with net cash flows from operating activities?
A)
$$\begin{array} { | l | l | l | }
\hline \text { Increase in inventories } & \text { Decrease in trade creditors } & \text { Increase in accrued expenses } \
\hline \text { add } & \text { subtract } & \text { subtract } \
\hline
\end{array}$$
B)
$$\begin{array} { | l | l | l | }
\hline \text { Increase in inventories } & \text { Decrease in trade creditors } & \text { Increase in accrued expenses } \
\hline \text { add } & \text { add } & \text { subtract } \
\hline
\end{array}$$
C)
$$\begin{array} { | l | l | l | }
\hline \text { Increase in inventories } & \text { Decrease in trade creditors } & \text { Increase in accrued expenses } \
\hline \text { subtract } & \text { subtract } & \text { add } \
\hline
\end{array}$$
D)
$$\begin{array} { | l | l | l | }
\hline \text { Increase in inventories } & \text { Decrease in trade creditors } & \text { Increase in accrued expenses } \
\hline \text { subtract } & \text { add } & \text { subtract } \
\hline
\end{array}$$

Question

Which combination is the appropriate operation to perform to the following accounts to reconcile net profit with net cash flows from operating activities?
A)
$$\begin{array} { | l | l | l | } 
\hline \text { Increase in inventories } & \text { Decrease in trade creditors } & \text { Increase in accrued expenses } \
\hline \text { add } & \text { subtract } & \text { subtract } \
\hline
\end{array}$$
B)
$$\begin{array} { | l | l | l | } 
\hline \text { Increase in inventories } & \text { Decrease in trade creditors } & \text { Increase in accrued expenses } \
\hline \text { add } & \text { add } & \text { subtract } \
\hline
\end{array}$$
C)
$$\begin{array} { | l | l | l | } 
\hline \text { Increase in inventories } & \text { Decrease in trade creditors } & \text { Increase in accrued expenses } \
\hline \text { subtract } & \text { subtract } & \text { add } \
\hline
\end{array}$$
D)
$$\begin{array} { | l | l | l | } 
\hline \text { Increase in inventories } & \text { Decrease in trade creditors } & \text { Increase in accrued expenses } \
\hline \text { subtract } & \text { add } & \text { subtract } \
\hline
\end{array}$$

Quizplus · Accepted Answer

An increase in inventories is subtracted because it represents cash outflow not reflected in net profit. A decrease in trade creditors is subtracted as it indicates a cash outflow for previous purchases not yet reflected in net profit. An increase in accrued expenses is added back because it represents expenses incurred but not yet paid in cash, reducing net profit without affecting cash flow.

Which Combination Is the Appropriate Operation to Perform to the Following