Question

An increase in inventories is deducted from net income to arrive at operating cash flow because a.cash payments to customers were larger than the purchases made during the period. b.purchases are larger than the cost of goods sold by the amount that inventories increased. c.purchases are less than the cost of goods sold by the amount that inventories increased. d.cash payments to customers were less than the purchases made during the period. e.All of these.

Answer 1

Answer:

b.purchases are larger than the cost of goods sold by the amount that inventories increased

Explanation:

As we know that operating cash flow refers to the cash amount i.e to be generated through day to day activities

So if there is an increase in inventories and the same is to be deducted from the net income because as the cost of goods sold is reported on the debit side of the income statement but if the purchase amount is more than the cost of goods sold so to maintain the accrual basis we need to do the adjustments.