nts is CORRECT? a. In the statement of cash flows, a decrease in inventories is subtracted from net income in the operating activities section. b. In the statement of cash flows, a decrease in accounts payable is subtracted from net income in the operating activities section. c. In the statement of cash flows, depreciation is subtracted from net income in the operating activities section. d. Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity. e. In the statement of cash flows, a decrease in accounts receivable is subtracted from net income in the operating activities section.

The cash flow statement is prepared in order to ascertain the cash inflow and the cash outflow into and out of the business in a given accounting period. The accrual concept states that expenses and revenue should be assigned to the correct accounting period, it must not be mixed up with the records of other financial period in order to ascertain the profit or loss for the period. The cash flow statement follow the accrual concept. There are two method used in preparing the cash flow statement which are direct method and indirect method. In the indirect method, the cash flow statement is segmented into operating activities section and financing activities section., in this method the cash flow statement starts with the net income while non cash item are removed to arrive at cash generated from operating activities.

The account payable account is a liability account, therefore, in the operating activities section of the cash flow statement if there is an increase in liability we will add the increase in the amount of liability to the net income. On the other hand, if there is a decrease in liability we will subtract the amount of the decrease from the net income.In other words a decrease in account payable is subtracted from the net income to arrive at the cash generated from operating activities in the cash flow statement.