Question

In: Accounting

On January 1, 2020, the balance in Tim Company's "Accounts Payable" account was $22,000. At the...

On January 1, 2020, the balance in Tim Company's "Accounts Payable" account was $22,000. At the December 31 year end, the balance was $30,000. In Tim's Cash Flow Statement for the year ended 12/31/2020, the $8,000 net increase will be
A Subtracted from Net Income in determining net cash provided by operating activities
B Reported as a cash outflow from financing activities
C Reported as a cash inflow from investing activities
D Added to Net Income in determining net cash provided by operating activities

Solutions

Expert Solution

Cash flow from operating activities shows cash outflows and inflows from day to day business activities such as cash paid to suppliers, cash received from customers, and so on.

While computing cash flow from operating activities using the Indirect method, We first start with net income and make some adjustments for noncash items.

An increase in accounts payable shows that the company made credit purchase during the year but in the cash flow statement we consider only cash items So, we will add the increase in accounts payable to net income

While computing net income, the company follows an accrual basis of accounting and the company considers expenses even if it's not paid. So, the increase of accounts payable by $8,000 is the credit purchase which was considered in net income.

So, we will add back this amount to net income

Checking the available options

A. This option is wrong as we subtract a "decrease in accounts payable from net income" while computing cash flow from operating activities (because the decrease in accounts payable shows that the company paid some amount to its supplier during the year. As there is cash outflow, therefore, we deduct it from net income as it was not considered in net income). Hence we don't subtract "increase in accounts payable from net income" while computing cash flow from operating activities.

B. This option is wrong as we make adjustments while computing cash flow from operating activities. The increase of accounts payable or credit purchase is not a part of financing activities. therefore, this option is wrong. Financing activities consist of items such as the issue of equity shares and payment of dividends and so on.

C. This option is wrong as investing activities relates to activities such as the purchase or sale of a fixed asset and so on. Therefore, Increase of accounts payable or credit purchase is not a part of investing activities

D. This option is correct on the basis of the above explanation. We will add an increase in accounts payable to net income while computing the cash flow from operating activities.

ekkarill92 answered 2 years ago
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