When Using the Direct Method to Prepare the Statement of Cash

question 8

Multiple Choice

When using the direct method to prepare the statement of cash flows,two adjustments must be made to cost of goods sold to calculate cash paid to suppliers.Which of the following correctly explains the two adjustments?

• A)Decreases in inventory are added to cost of goods sold and decreases in accounts payable are added to cost of goods sold.
• B)Increases in inventory are added to cost of goods sold and increases in accounts payable are deducted from cost of goods sold.
• C)Increases in inventory are deducted from cost of goods sold and increases in accounts payable are deducted from cost of goods sold.
• D)Decreases in inventory are deducted from cost of goods sold and decreases in accounts payable are deducted from cost of goods sold.
• E)None of the answer choices is correct.

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Definitions:

Physical Capital

Tangible assets such as buildings, machinery, and equipment that are used in producing goods and services.

Labor And Talent

The workforce available for employment and their skills, abilities, and expertise in various domains.

Formal Investment

Financial contributions into a business or project, typically made by investors seeking a return and documented through formal agreements.

Start A Business

The process of undertaking financial, administrative, and operational activities to initiate a commercial enterprise.