Question

MC Qu. 12-82 Bailey Hill Co. uses the indirect... Bailey Hill Co. uses the indirect method...

MC Qu. 12-82 Bailey Hill Co. uses the indirect...

Bailey Hill Co. uses the indirect method to determine its net cash flows from operating activities. During the course of the year, the company's Accounts Receivable increased by $28,000 and its Accounts Payable decreased by $14,000. If these are the only two adjustments required to convert net income to net cash provided by operating activities, the combined effect will be a(n):

Multiple Choice

subtraction of $14,000.

addition of $14,000.

addition of $42,000.

subtraction of $42,000.

Homework Answers

Answer #1
Increase in AR ($28000)
Decrease in AP ($14000)
Net decrease $42000(D)

A decrease in current assets such as accounts receivable,inventory etc. is treated as a cash inflow for the period and hence added to net income to compute net cash flow from operations for the period and vice versa..On the other hand,a decrease in current liabilities such as accounts payable,creditors etc. is treated as a cash outflow for the period and hence deducted to net income to compute net cash flow from operations for the period and vice versa.

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