The indirect 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.
B) Separately lists each major item of operating cash payments.
C) Reports income and then adjusts it for items necessary to determine net cash provided or used by operating activities.
D) Is required if the company is a merchandiser.
E) Must not be used in all circumstances.

Question

Quizplus · Accepted Answer

The indirect method starts with net income and then makes adjustments to income for non-cash items and changes in current assets and liabilities to arrive at net cash provided or used by operating activities. There is no requirement for the company to be a merchandiser to use this method, and it may not be the best choice in all circumstances. Choices A and B describe the direct method, which is an alternative way to prepare the operating activities section of the statement of cash flows.

The Indirect Method for the Preparation of the Operating Activities