Question

Bailey Hill Co. uses the indirect method to determine its net cash flows from operating activities. During the course of the year, the company's Accounts Receivable increased by $28,000 and its Accounts Payable decreased by $14,000. If these are the only two adjustments required to convert net income to net cash provided by operating activities, the combined effect will be a(n):

Answer 1

Answer:

The answer is Net income will be reduced by $42,000

Explanation:

Indirect method of preparing cash floe starts with net income.

In cash flow provided by operating activities;

Increase is liabilities is a cash inflow while decrease in liabilities in a cash outflow.

In the same vein, increase in asset is a cash outflow while decrease in asset is a cash inflow.

The effect of these adjustments will be:

Increase in accounts receivable - ($28,000)

Decrease in accounts payable----($14,000)

Cash provided by operating activities - ($42,000)

Net income will be reduced by $42,000