Where the entity uses the direct method a note to the accounts reconciling cash flows from operating activities to net profit is required because:
A) Complex calculations are required to convert cash-based revenues.
B) Items such as depreciation are only recorded in a cash system and not an accrual system.
C) There is likely to be a disparity between cash flows from operations under AASB 107 and the profits reported in the statement of comprehensive income.
D) The direct method is required under AASB 107.

Question

Quizplus · Accepted Answer

The note to the accounts reconciling cash flows from operating activities to net profit is required because there is likely to be a disparity between cash flows from operations under AASB 107 and the profits reported in the statement of comprehensive income. This disparity occurs because the direct method only records cash-based transactions, whereas the statement of comprehensive income is prepared using an accrual accounting method. The note helps users of the financial statements to understand the differences between the two methods so they can make more informed decisions.

Where the Entity Uses the Direct Method a Note to the Accounts