You Are on a Team Responsible for Addressing Cash Flow

You are on a team responsible for addressing cash flow problems with other managers in your corporate division. Your accounting department has provided your team with the statement of cash flows prepared using the indirect method. At your first meeting, some of the managers have expressed concerns about the statement’s understandability and do not view the statement as anything other than a “rearranged income statement”. The managers have requested that your team explain to them how the statement is constructed.

Required:

a. Explain to your managers why the indirect method is a useful approach to reporting cash flows from operating activities.

b. Explain to your managers why increases in current assets are subtracted from net income and increases in current liabilities are added to net income to calculate the cash flow provided by operating activities.

c. Explain to your managers any differences between the indirect method and the direct method of preparing the investing and financing sections of the statement of cash flows.