When preparing a statement of changes in financial position using the cash basis for defining funds, an increase in ending inventory over beginning inventory will result in an adjustment to reported net earnings because
A) Funds were increased since inventory is a current asset
B) The net increase in inventory reduced cost of goods sold but represents an assumed use of cash
C) Inventory is an expense deducted in computing net earnings, but is not a use of funds
D) All changes in noncash accounts must be disclosed under the all financial resources concept

Question

Quizplus · Accepted Answer

An increase in ending inventory over beginning inventory decreases the cost of goods sold, increasing the reported net earnings. However, under the cash basis for defining funds, an increase in inventory is not considered a use of cash. Therefore, an adjustment must be made to reflect the assumed use of cash associated with the increase in inventory. This adjustment is made by subtracting the increase in inventory from the reported net earnings.

When Preparing a Statement of Changes in Financial Position Using