Question

Krech Corporation's comparative balance sheet appears below:

Comparative Balance Sheet
	Ending Balance			Beginning Balance
Assets:
Current assets:
Cash and cash equivalents	$	31,000		$	28,000
Accounts receivable		18,000			20,000
Inventory		58,000			56,000
Prepaid expenses		12,000			10,000
Total current assets		119,000			114,000
Property, plant, and equipment		374,000			354,000
Less accumulated depreciation		190,000			165,000
Net property, plant, and equipment		184,000			189,000
Total assets	$	303,000		$	303,000
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable	$	13,000		$	9,000
Accrued liabilities		52,000			53,000
Income taxes payable		67,000			69,000
Total current liabilities		132,000			131,000
Bonds payable		76,000			73,000
Total liabilities		208,000			204,000
Stockholders’ equity:
Common stock		28,000			26,000
Retained earnings		67,000			73,000
Total stockholders’ equity		95,000			99,000
Total liabilities and stockholders' equity	$	303,000		$	303,000

The company's net income (loss) for the year was ($3,000) and its cash dividends were $3,000. It did not sell or retire any property, plant, and equipment during the year. The company uses the indirect method to determine the net cash provided by operating activities.

Which of the following is correct regarding the operating activities section of the statement of cash flows?

Garrison 16e Rechecks 2017-12-19

Multiple Choice

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

Answer 1

--When preparing Statement of Cash Flows using Indirect Method, the Net Income is adjusted to reconcile Net cash provided by Operating activities.

--While doing so,
>Decrease in current assets and Increase in current Liabilities is ADDED to net income, and
>Increase in current asset and decrease in current liabilities is SUBTRACTED from Net Income.

--In given data, the accounts receivables can be seen as "decreased" while inventory balance has "increased". Both of these are CURRENT ASSETS,
Hence, Change in account receivables (decrease) will be ADDED to Net Income and Change in Inventory (an increase) will be subtracted from Net Income.

--This means correct answer = Option #2.