Question

Rick Corporation's Accounts Receivable decreased by $25,000 during the year. What is the adjustment to the cash flow statement when it's prepared by the indirect method?

a Subtract the decrease from the net income in operating activities.

b Add the decrease to the net income in operating activities.

c Add the decrease in the investing activities section.

d Subtract the decrease in the financing activities.

Answer 1

The answer is Letter B - add the decrease to the net income in operating activities.

When there's a decrease of the accounts receivable account, that means that the company has a cash inflow. The company collected the receivables in that year, but the sales were not yet reported in the net income so this decrease should be added to reflect the correct net income amount.

Note: accounts receivable is a current asset - any increase in the current asset is a reduction in cash flow while any decrease in the current asset is an addition to the cash flow.