Question

Which of the following should be added to net income in calculating net cash flow from operating activities using the indirect method? a.A decrease in accounts payable b.An increase in accounts receivable c.Common stock dividends declared and paid d.A decrease in inventory

Answer 1

Answer:

A decrease in inventory

Explanation:

Inventory refers to the finished goods that a company has in its warehouse, and are meant of sale.  The value of inventory is recorded as a current asset. If sold on a cash basis, it converts to cash or account receivable if sold on credit.

A reduction in inventory signals that some sales transaction has happened.  A sale contributes directly to the net come income of a business.  Sales generate or increase cash to the business. Its a cash inflow in the cash flow statement. Reduction in inventory is, therefore, an indirect communication in the increase of net income.