On March 31, 2005, Cars, Inc. owes Preston Devices, one of its suppliers, $25,000 for previous purchases. During April 2005, Preston sells Cars devices with a sales price of $10,000 and a cost to Preston of $8,000. During April Cars pays Preston $12,000 against the amount owed to Preston. If Preston had no other sales and records no other collections from customers during the month of April, the operating section of Preston's indirect method statement of cash flows for April will show the following de-accrual adjustments to net income:

1. Subtract change in accounts receivable; add change in inventory.
2. Add change in accounts receivable; subtract change in inventory
3. Add change in accounts receivable; add change in inventory.
4. Subtract change in accounts receivable; subtract change in inventory.

Am thinking that option 4 is the correct one, can you please help me here..

Hello, I see there has been 180 views with no solutions, can anyone help me here please...

I'm also stuck on this one. I thought option 1 was the correct answer. Any input...

I'm not entirely sure what this question means by "de accruals". Sounds like some sort of street talk to me: "yeah man, trying to work out de accruals".

But anyway, seeing as it is cash flow based:

* A reduction in receivables means a cash inflow (because debtors have paid money) - in this case opening bal $25k, closing bal = $23k, therefore receivables has reduced.

* A reduction in inventory also means a cash inflow (because inventory has been sold).

With Cash flow statements using the indirect method, in the operating section, you start with the operating profit and add cash inflows and deduct cash outflows relating to working capital, so the answer to this one is number 3, because both represent cash inflows.