Question

Which of the following should be added to net income in calculating net cash flow from operating activities using the indirect method?

A. an increase in inventory
B. a decrease in accounts payable
C. preferred dividends declared and paid a
D. decrease in accounts receivable

Answer 1

Answer:

It is decrease in accounts receivable (D)

Explanation:

An Increase in Inventory : the effect of this transaction will reduce the cash position of the company because more cash is being tied down as inventory at a cost.

A decrease in accounts payable : Here, more cash is being paid to off-set liability owed to suppliers and this will reduce company's cash position.

Preferred dividends declared and paid : This is an outflow of cash paid to equity investors as a return on their investment which will impact negatively on the company cash position.

Decrease in accounts receivable : This is an inflow of cash from the settlement of trade receivable owed by our customers which will impact positively on our cash position.