When a company uses the direct method to determine the net cash flows from operating activities, cash flows from operating activities will:
A) be identical to the amount reported using the indirect method.
B) be larger if there is a net cash inflow and smaller if there is a net cash outflow compared to the amount reported using the indirect method.
C) always be larger than the amount reported using the indirect method.
D) be larger if there is a net cash outflow and smaller if there is a net cash inflow co mpared to the amount reported using the indirect method.

Question

Quizplus · Accepted Answer

When a company uses the direct method to determine the net cash flows from operating activities, the cash flows from operating activities will be identical to the amount reported using the indirect method. The only difference is that the direct method presents a more detailed breakdown of the cash inflows and outflows, while the indirect method starts with net income and makes adjustments to arrive at the net cash flow from operating activities. However, the end result should be the same in both methods.

When a Company Uses the Direct Method to Determine the Net