Assume that accounts payable of an entity increased by $15,000 in 20X1. Which of

Question

Assume that accounts payable of an entity increased by $15,000 in 20X1. Which of the following statements is true of accounts payable while preparing a statement of cash flows?

a. The amount of increase in accounts payable of $15,000 must be deducted from the closing cash balance.

b. The amount of increase in accounts payable of $15,000 must be deducted from the net income.

c. The amount of increase in accounts payable of $15,000 must be added back to the net income.

d. The amount of increase in accounts payable of $15,000 must be added to closing cash balance.

Explanation / Answer

Answer is C -"The amount of increase in accounts payable of $15,000 must be added back to the net income".

While preparing cash flow statement, Under Operating Activities, We need to adjust the changes in the working capital items such as changes in the current assets and current liabilities in ordered to find out the net cash used or provided from operating activities

The following are adjustments for Working capital Items

Add : Decrease in current assets

Less : Increase in current assets

Add : Increase in Current Liability

Less : Decrease in current liability

In this case, there is an Increase in Accounts Payable whcih is a current liabiliity and there for we should added back $15,000 Increase to the Net Income

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