A criticism of the indirect approach to presenting cash flows from operating activities is:
A) adding back expenses such as depreciation may suggest that these items are sources of cash
B) it is unnecessarily complicated
C) it requires cash inflows to be netted against cash outflows
D) A and B

Question

Quizplus · Accepted Answer

The criticism of the indirect approach is that adding back expenses such as depreciation may suggest that these items are sources of cash, which can be misleading. Depreciation, for example, is a non-cash expense that reduces net income but does not actually represent a cash outflow. Therefore, adding it back to net income as part of the indirect method can give the impression that the company has received cash when it has not.

A Criticism of the Indirect Approach to Presenting Cash Flows