Two methods are available to prepare the operating activities section of a statement of cash flows.Which of the following statements regarding these two methods is false?
A) If a company uses the indirect method, it must separately disclose the cash payments made for interest and income taxes.
B) If a company uses the direct method, it must present a separate schedule which reconciles net income to net cash from operating activities.
C) Advocates of the direct method believe that the indirect method reveals too much by telling readers gross amounts of cash receipts and cash payments from operations.
D) The FASB prefers the direct method, while most companies use the indirect method in practice.

Question

Quizplus · Accepted Answer

- Statement C is false because advocates of the direct method argue that it provides more useful information by showing gross cash receipts and payments, not that the indirect method reveals too much. The indirect method starts with net income and adjusts for non-cash transactions and changes in working capital to arrive at net cash from operating activities, without detailing gross receipts and payments.

Two Methods Are Available to Prepare the Operating Activities Section