An increase in the Inventory account of a company from $10,000 at the beginning of the year to $15,000 at the end of the year would be shown on the company's statement of cash flows prepared under the indirect method as:
A)an addition to net income of $5,000 in order to arrive at net cash provided by operating activities.
B)a deduction from net income of $5,000 in order to arrive at net cash provided by operating activities.
C)an addition to net income of $15,000 in order to arrive at net cash provided by operating activities.
D)a deduction from net income of $10,000 in order to arrive at net cash provided by operating activities.

Question

Quizplus · Accepted Answer

An increase in inventory means that the company spent cash to purchase additional inventory during the year. Under the indirect method, changes in current asset accounts (such as inventory) are adjusted as a deduction from net income in order to arrive at net cash provided by operating activities. Therefore, an increase in inventory of $5,000 would be deducted from net income in order to arrive at net cash provided by operating activities.

An Increase in the Inventory Account of a Company from $10,000