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:

Coercion

The act of compelling a party to act in an involuntary manner by use of threats, force, or pressure.

Contract Force

The legal binding power of a contract that obliges the parties involved to fulfill their respective duties as outlined.

Ratification

The act of formally approving or confirming a decision or agreement, making it officially valid.

Adoption Or Affirmance

The act of accepting, endorsing, or formally confirming a previous decision or action, especially in a legal context.