True or false? Changes in working capital are subtracted from net income on the cash flow statement.
- True
- False
Explanation: The correct answer is True. Changes in working capital, such as fluctuations in accounts receivable, inventory, and accounts payable, are indeed subtracted from net income on the cash flow statement. The cash flow statement is a financial statement that provides insight into how a company manages its cash position during a specific period. It is divided into three sections: operating activities, investing activities, and financing activities. Changes in working capital directly impact a company’s cash flow from operating activities, as they represent cash inflows or outflows that arise from day-to-day business operations. When working capital increases, it typically indicates that a company’s current assets are growing faster than its current liabilities, leading to a cash outflow. Conversely, when working capital decreases, it suggests that a company’s current liabilities are increasing faster than its current assets, resulting in a cash inflow. Therefore, to accurately reflect the cash generated or used by operating activities, changes in working capital are adjusted from net income on the cash flow statement. This adjustment ensures that the cash flow statement provides a comprehensive view of a company’s cash position and its ability to generate cash from its core business operations. Hence, the statement ‘Changes in working capital are subtracted from net income on the cash flow statement’ is true, as it aligns with the standard practice of preparing cash flow statements in accordance with generally accepted accounting principles (GAAP).