medium · Principles of Finance

When reconciling Net Income to Cash Flow from Operations (CFO), how should a $25M increase in Accounts Payable be treated, and why?

1. Subtract $25M from Net Income because it is a future obligation that reduces current liquidity.
2. Add $25M to Net Income because it represents an expense recognized that has not yet been paid in cash.
3. Subtract $25M from Net Income as a part of the increase in working capital investment.
4. Add $25M to Net Income only if the associated expense was part of Cost of Goods Sold.

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