Question

On the cash flow statement, buying inventory on account is not a use of cash. True or False

Most companies use the direct method to prepare the statement of cash flows. True or False

A decrease in accounts payable is added to net income when using the indirect method of calculating cash flows provided by operating activities. True or False

Dividends declared is not a cash flow. True or False

Answer 1

Part 1)

The correct answer is True

Explanation

Buying inventory on cash account is not a use of cash as it does not lead to cash outflow. Purchase of inventory on account does not envolve any cash outflow, so it has no impact on cash flow statement

Part 2)

The correct answer is False

Explanation

Most companies use indirect method of cash flow statement instead of direct method. In indirect method, net income in taken as base to arrive at the net cash flow from operating activities.

Part 3)

The correct answer is False

Explanation

Decrease in account payable is subtracted from net income instead of adding it in net income, as reduction in account payable means cash has been paid to supplier in excess of purchases made from it , so it is subtracted  from net income

Part 4)

True

Explanation

Declaration of dividend is not a cash flow, as no cash is paid at the date of declaration of dividend. So it does not lead to cash outflow.