Which of the following statements regarding the calculation of cash flows from operating activities under the direct method is true?
A)When the direct method is used,each revenue and expense account on the income statement is individually examined to calculate the cash flows from operating activities.
B)Noncash revenues and expenses must be included in cash flows from operating activities when preparing a statement of cash flows using the direct method.
C)Depreciation is reported as a cash inflow in the cash flows from operating activities when the direct method is used.
D)A loss on the sale of a long-term asset is subtracted in the cash flows from operating activities when the direct method is used.

Question

Quizplus · Accepted Answer

When the direct method is used, each revenue and expense account on the income statement is individually examined to calculate the cash flows from operating activities. This involves analyzing all cash received from customers and paid to suppliers, employees, and other vendors. Noncash revenues and expenses are not included in cash flows from operating activities under the direct method. Depreciation is reported as a noncash expense and is added back in the cash flows from operating activities, not reported as a cash inflow. A loss on the sale of a long-term asset is also added back, not subtracted, in the cash flows from operating activities.

Which of the Following Statements Regarding the Calculation of Cash