Assume a Company Uses the Indirect Method to Prepare Its

Multiple Choice

Assume a company uses the indirect method to prepare its statement of cash flows. If inventory decreases and unearned revenue increases during an accounting period, what does the company do with the changes in these accounts to calculate net cash flows from operating activities?

A) Both are added to net income.
B) The change in inventory is added to net income; the change in unearned revenue is subtracted.
C) Both are subtracted from net income.
D) The change in unearned revenue is added to net income; the change in inventory is subtracted.