Questions: Multiple Choice Question Inventory at the beginning of the period had a debit balance of 9,000, and a debit balance of 7,000 at the end of the period. Using the indirect method, this will be reported in the operating section of the statement of cash flows as: an increase of 2,000 which will be added to net income an increase of 2,000 which will be subtracted from net income a decrease of 2,000 which will be subtracted from net income a decrease of 2,000 which will be added to net income

The answer is: a decrease of $2,000 which will be added to net income.

Explanation:

When using the indirect method to prepare the statement of cash flows, changes in working capital accounts (such as inventory) are adjusted to reconcile net income to net cash provided by operating activities. Here’s how each option is evaluated:

1. An increase of $2,000 which will be added to net income:

   • This is incorrect. The inventory decreased from $9,000 to $7,000, which is a decrease, not an increase.

2. An increase of $2,000 which will be subtracted from net income:

   • This is incorrect for the same reason as above. The inventory did not increase; it decreased.

3. A decrease of $2,000 which will be subtracted from net income:

   • This is incorrect. A decrease in inventory means that less cash was tied up in inventory, which is a positive adjustment to net income.

4. A decrease of $2,000 which will be added to net income:

   • This is correct. When inventory decreases, it indicates that the company sold more goods than it purchased, which means cash was generated from these sales. Therefore, the $2,000 decrease in inventory is added to net income in the operating section of the statement of cash flows.

In summary, the correct option is that the decrease of $2,000 in inventory will be added to net income.