If inventory decreases and deferred revenue increase during an accounting period while the indirect method is used,what does the company do with the changes in these accounts to calculate net cash flows from operating activities?
A)Both are added to net income.
B)The change in inventory is added to net income; the change in unearned revenue is subtracted.
C)Both are subtracted from net income.
D)The change in unearned revenue is added to net income; the change in inventory is subtracted.

Question

Quizplus · Accepted Answer

When using the indirect method to calculate net cash flows from operating activities, a decrease in inventory is added back to net income because it means less cash was used than reported in net income. An increase in deferred (or unearned) revenue is also added to net income because it represents cash received that has not yet been earned and thus not included in net income.

If Inventory Decreases and Deferred Revenue Increase During an Accounting