QUESTION 6 An increase in the Accounts Receivable account of a company from $40,

Question

QUESTION 6 An increase in the Accounts Receivable account of a company from $40,000 at the beginning of the year to $50,000 at the end of the year would be shown on the company's statement of cash flows prepared under the indirect method as O an addition to net income of $10,000 in order to arrive at cash flows from operating activities. O an addition to net income of $20,000 in order to arrive at cash flows from operating activities O a deduction from net income of $10,000 in order to arrive at cash flows from operating activities O a deduction from net income of $25,000 in order to arrive at cash flows from operating activities

Explanation / Answer

Answer is C.

Under the indirect method of statement of cash flows, an increase in current assets is deducted from net income to arrive at the cash flows from operating activities.

Increase in Accounts Receivable = Ending Accounts Receivable - Beginning Accounts Receivable
Increase in Accounts Receivable = $50,000 - $40,000
Increase in Accounts Receivable = $10,000

So, increase in accounts receivable would be shown as a deduction from net income of $10,000 in order to arrive at the cash flows from operating activities.

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