Assume a Company Uses the Direct Method to Prepare Its

question 34

Multiple Choice

Assume a company uses the direct method to prepare its statement of cash flows. If the company's inventory and accounts payable both increase during the accounting period, how would these changes affect cash flow calculations?

• A) The changes in each account are both added to net income.
• B) The change in inventory is subtracted from cost of goods sold and the change in accounts payable is added to cost of goods sold to find the cash paid to suppliers.
• C) The changes in each account are both subtracted from net income.
• D) The change in inventory is added to cost of goods sold and the change in accounts payable is subtracted from

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Definitions:

Account Receivable

Money owed to a business by its clients or customers for goods or services delivered but not yet paid for.

Credit Terms

Terms for payment on account by the buyer to the seller.

Sales Discount

A reduction in the sale price offered by a seller to a buyer, usually to encourage prompt payment or to increase sales volume.

Invoice Date

Invoice Date refers to the date listed on an invoice, indicating when it was issued and often starting the timeline for payment due.