Under the indirect method,an increase in inventory is added to net income and a decrease in inventory is subtracted from net income to arrive at net cash flows from operating activities.

Question

Quizplus · Accepted Answer

The first sentence describes the incorrect approach of adding an increase in inventory to net income and subtracting a decrease in inventory, which would actually inflate net cash flows from operating activities. The correct approach, as stated in the second sentence, is to subtract an increase in inventory and add a decrease in inventory to net income to arrive at accurate net cash flows from operating activities under the indirect method.

Under the Indirect Method,an Increase in Inventory Is Added to Net