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

Question

Quizplus · Accepted Answer

The indirect method adjusts net income for non-cash items such as depreciation, changes in working capital, and other non-operating items to determine net cash provided or used by operating activities. It is commonly used and required by GAAP. Choices A, B, and D describe aspects of the direct method, which is an alternative way to prepare the operating activities section. Choice C is incorrect because the indirect method can be used in all circumstances.

The Indirect Method for the Preparation of the Operating Activities