Question

Which of the following statements is CORRECT?

1) In the statement of cash flows, a decrease in accounts receivable is subtracted from net income in the operating activities section.
2) Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity.
3) In the statement of cash flows, a decrease in accounts payable is subtracted from net income in the operating activities section.
4) In the statement of cash flows, depreciation is subtracted from net income in the operating activities section.
5) In the statement of cash flows, a decrease in inventories is subtracted from net income in the operating activities section.

Answer 1

In the statement of cash flows, a decrease in accounts payable is subtracted from net income, and depreciation is added back in the operating activities section. These adjustments are made to reconcile net income to the cash generated from operating activities.

Step-by-step explanation:

The question pertains to the correct interpretation of adjustments made in the operating activities section of the statement of cash flows. Which statement is correct:

1. In the statement of cash flows, a decrease in accounts receivable is added to net income in the operating activities section, not subtracted, because this represents cash that has been collected from customers.
2. Dividends do show up in the statement of cash flows under financing activities if they are paid out, or under operating activities if they are received.
3. In the statement of cash flows, a decrease in accounts payable is subtracted from net income in the operating activities section as this represents cash paid to suppliers.
4. In the statement of cash flows, depreciation is added back to net income in the operating activities section because it is a non-cash charge.
5. In the statement of cash flows, a decrease in inventories is added to net income in the operating activities section because it represents inventory that was sold and turned into cash.

Therefore, the correct statements according to the Generally Accepted Accounting Principles (GAAP) are 3 and 4.