Which of the following statements is true regarding GAAP and reporting operating activities on the statement of cash flows?
A) The direct method is required of large companies.
B) The GAAP prefers the indirect method.
C) The GAAP prefers the direct method.
D) The GAAP did not express a preference for either the direct or indirect method.

Question

Quizplus · Accepted Answer

While GAAP permits both the direct and indirect methods of reporting operating activities on the statement of cash flows, it does state a preference for the direct method. However, if a company chooses to use the indirect method, it must also provide a reconciliation of net income to cash flows from operating activities in the footnotes. Therefore, statement B is incorrect as GAAP does not prefer the indirect method over the direct method. Statement A is also incorrect as the direct method is not required for large companies; rather, it is an optional method of reporting cash flows from operating activities. Statement D is also incorrect as GAAP does express a preference for the direct method over the indirect method.

Which of the Following Statements Is True Regarding GAAP and Reporting