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Excerpts from Neuwirth Corporation's comparative balance sheet appear below: Ending Balance Beginning Balance Cash and cash...

Excerpts from Neuwirth Corporation's comparative balance sheet appear below:

Ending Balance Beginning Balance
Cash and cash equivalents $ 56,000 $ 46,000
Accounts receivable $ 43,000 $ 47,000
Inventory $ 84,000 $ 87,000

Which of the following is the correct treatment within the operating activities section of the statement of cash flows using the indirect method?

  • The change in Accounts Receivable is added to net income; The change in Inventory is subtracted from net income

  • The change in Accounts Receivable is subtracted from net income; The change in Inventory is subtracted from net income

  • The change in Accounts Receivable is added to net income; The change in Inventory is added to net income

  • The change in Accounts Receivable is subtracted from net income; The change in Inventory is added to net income

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Answer #1

Under indirect method of cash flow any reduction in account receivable or inventory is to be added back to the net income because the reduction in the account receivable inventory will be the cash received by the company which will increase the cash flow.

Therefore in this cass there is a reduction in both ,account receivable as well as inventory during the year.

Accounts receivable = 47,000 - 43,000 = $4,000

Inventory = 87,000 - 84,000 = $3,000

Therefore both the change is to be added to net income.

So the correct option is 3rd i.e. the changing account receivable is added to net income, the change in inventory is added to net income.

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