If a Company Uses the Indirect Method to Prepare the Statement

question 27

Multiple Choice

If a company uses the indirect method to prepare the statement of cash flows, how will the adjustment to reflect the amount of cash received from customers be presented on the statement?

• A)The adjustment will be for the increase or decrease in inventory during the period and will adjust net income in the operating activities section on the statement of cash flows.
• B)The adjustment will be for the increase or decrease in accounts payable during the period and will adjust net income in the operating activities section on the statement of cash flows.
• C)The adjustment will be for the increase or decrease in accrued expenses during the period and will adjust net income in the operating activities section on the statement of cash flows.
• D)The adjustment will be for the increase or decrease in accounts receivable during the period and will adjust net income in the operating activities section on the statement of cash flows.

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Definitions:

Priced Factor

An element affecting the pricing of securities that is reflected in market prices due to its influence on asset returns.

Market Illiquidity

A situation in which an asset cannot be easily sold or exchanged for cash without a substantial loss in value.

Book-to-market Ratio

A valuation metric comparing the book value of a company to its market price.

Momentum

An investment strategy that involves buying securities that have had high returns over a certain period and selling those that have had poor returns, based on the belief that trends will continue.