Which of the following statements is true when using the indirect method of preparing the Operating Activities category of the statement of cash flows?
A)Inventory decreases are subtracted from net income.
B)Inventory increases are subtracted from net income.
C)Inventory increases are added to net income.
D)None of these statements are true.

Question

Quizplus · Accepted Answer

Under the indirect method, inventory increases are subtracted from net income because an increase in inventory means that the company spent cash to purchase goods that are still on hand and not yet sold. This means that the increase in inventory is not considered an operating cash inflow, and therefore, it is subtracted from net income to arrive at the cash provided by operating activities.

Which of the Following Statements Is True When Using the Indirect