To convert an indirect statement of cash flows to a direct basis, the analyst would: A) add decreases in accounts receivables to net sales. B) subtract customer cash advances from net sales. C) subtract increases in accounts payable from the cost of goods sold. D) add increases in inventory to the cost of goods sold. Third one…
increase in AP gets added to Cost of Goods Sold – So C is wrong. Increase in inventory is subtracted from Net Sales. – So D is wrong. Cash Advances are added to Cash Sales – So B is wrong. Leaves A as the answer.
As per CFA book 3, inc in inventory is added to COGS… Your answer is correct though… here is the explanation: A decrease in accounts receivables represents an increase in cash so this should be added to the sales figure. Cash advances from customers represent a source of cash so these should be added to sales. Increases in accounts payable represent an increase in cash so these should be added to cost of goods sold (which is a negative number). Increases in inventory represent a use of cash so these would be subtracted from cost of goods sold.
i did make that mistake in the 3 problems… Yes AR goes with Sales AP and Inv go along with COGS