Under the Indirect Method of Preparing the Statement of Cash

question 53

Multiple Choice

Under the indirect method of preparing the statement of cash flows, an increase in inventories is deducted from net income to calculate cash provided or used by operating activities because

• A)cash payments to customers were less than the inventory purchases made during the period.
• B)cash paid to acquire inventory was greater than cost of goods sold by the amount that inventories increased.
• C)cash payments to customers were larger than the inventory purchases made during the period.
• D)inventory purchases were less than the cost of goods sold by the amount that inventories increased.

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Definitions:

Receivable Turnover

A financial metric indicating the efficiency of a company in collecting its accounts receivable or the effectiveness of its credit policy.

Inventory Turnover

A metric representing the frequency at which a business's stock is sold and restocked within a given timeframe, reflecting how effectively inventory is handled.

Current Ratio

An indicator of how well a company can handle its immediate debts, assessing its ability to cover obligations maturing in one year or less.

Acid-test Ratio

A financial metric that measures a company's ability to cover its short-term liabilities with its most liquid assets, excluding inventory.