Question

On the statement of cash flows, a decrease in merchandise inventory is shown as:

Group of answer choices

A. a deduction from net income in the cash flows from operating activities section

B. an addition to net income in the cash flows from operating activities section

C. a cash inflow in the cash flows from financing activities section

D. a cash outflow in the cash flows from financing activities section

Answer 1

Correct answer--------------(B) an addition to net income in the cash flows from operating activities section.

.

Cash is increased when Current liability increase or Current asset Decrease.
Cash is Decreased when Current liability Decrease or Current asset Increase.
Depreciation or loss on sale of any asset is a non cash expense hence it will be added to net income to get operating cash
Profit on sale of asset or investment is a non cash profit and hence will be deducted from operating income.

Similarly when merchandise inventory decrease it means cash paid for merchandise inventory in current year is less than the actual purchase so it is added to net income to get Cash from operations.