Question

Bailey Hill Co. uses the indirect method to determine its net cash flows from operating activities. During the course of the year, the company's Accounts Receivable increased by $28,000 and its Accounts Payable decreased by $14,000. If these are the only two adjustments required to convert net income to net cash provided by operating activities, the combined effect will be a(n):

Answer 1

Answer: d. subtraction of $42,000.

Explanation:

An increase in Current Assets such as Accounts Receivable is considered to be a cash outflow because it means that more assets were not converted to actual cash.

A decrease in Current Liabilities is a cash outflow as well as it means that the company used cash to pay off these liabilities thereby reducing the cash balance.

Combined Effect is therefore = -28,000 - 14,000

= -$42,000