Which method of preparing the operating activities section of the statement of cash flows adjusts net income to remove the effects of deferrals and accruals for revenues and expenses?
A)The direct method
B)The indirect method
C)Both direct and indirect methods
D)Neither the direct method nor the indirect method

Question

Quizplus · Accepted Answer

The indirect method adjusts net income to remove the effects of deferrals and accruals for revenues and expenses. The direct method directly lists cash inflows and outflows for operating activities without adjusting net income. Therefore, choice A is incorrect. Both direct and indirect methods prepare the operating activities section, but only the indirect method adjusts for deferrals and accruals, so choice C is also incorrect. Lastly, choice D is incorrect as at least one of the methods prepares the operating activities section.

Which Method of Preparing the Operating Activities Section of the Statement