Under the direct method of preparing the statement of cash flows,a decrease in merchandise inventory would be:

Question

Quizplus · Accepted Answer

Under the direct method, changes in inventory are reported as direct cash inflow or outflow, depending on whether there was an increase or decrease in inventory. A decrease in merchandise inventory means that less cash was spent on inventory purchases during the period, and this decrease should be added to the cost of goods sold, which is subtracted from sales revenue to arrive at the gross profit. Therefore, the answer is D.

Under the Direct Method of Preparing the Statement of Cash