Question

During the year, Doug's Bakery decreased its accounts receivable by $50, increased its inventory by $100, and decreased its accounts payable by $50. For these three accounts, the firm has a net:

Multiple Choice

• $200 use of cash.

• $100 use of cash.

• $0 use of cash.

• $100 source of cash.

• $200 source of cash.

Answer 1

The correct answer is $100 use of cash

• Decrease in accounts receivable means cash  is received from the customers to whom goods were sold on credit. As there will be a cash inflow this is a source of cash.
• Increase in inventory means cash paid to buy the inventory which would be used in production purposes. As there will be an outflow of cash in purchasing the inventory this is a use of cash.
• Decrease in accounts payable means making payments to the suppliers from whom credit purchases were made. As there will be an outflow of cash when payment is made this is a use of cash.

Therefore calculation of Net use of cash

= Increase in inventory + Decrease in accounts payable - Decrease in accounts receivable

= $50 + 100 - $50
= $100