The direct method of preparing the statement of cash flows:
A)has an identical operating activities section as the indirect method.
B)is used by a vast majority of companies.
C)is preferred by FASB.
D)is much easier for companies to compute.

Question

Quizplus · Accepted Answer

The FASB does not have a preference for either the direct or indirect method, but it does encourage companies to use the direct method because it provides more detailed information about cash flows from operating activities. However, the direct method requires more detailed information and is less commonly used than the indirect method, which reconciles net income to cash flows from operating activities. Therefore, option A and B are incorrect. Option D is also incorrect as the direct method requires more detailed information and is therefore more difficult for companies to compute.

The Direct Method of Preparing the Statement of Cash Flows