The direct method for the preparation of the operating activities section of the statement of cash flows:
A)Separately lists each major item of operating cash receipts and cash payments.
B)Reports adjustments to reconcile net income to net cash provided or used by operating activities in the statement.
C)Reports an amount of cash flows from operations different from the amount determined using the indirect method.
D)Is required if the company is a merchandiser.
E)Is required by the FASB.

Question

Quizplus · Accepted Answer

The direct method involves separately listing each major item of operating cash receipts and cash payments, providing a detailed breakdown of the sources and uses of cash for operating activities. This method does not involve adjustments to reconcile net income to net cash provided or used by operating activities, as it is done in the indirect method. Choice B refers to the indirect method. Choice C is incorrect because the amount of cash flows from operations should be the same whether the direct or indirect method is used. Choice D is incorrect because the direct method can be used by any type of company, not just merchandisers. Choice E is incorrect because the FASB does not require the use of the direct method, although it is a permissible option.

The Direct Method for the Preparation of the Operating Activities