Analysts prefer the indirect method for the preparation of the cash flow statement because the size and direction of the items reconciling net income to net cash flow from operating activities provide a yardstick for measuring the
A)current ratio.
B)return on assets.
C)quality of earnings.
D)rate of dividends.

Question

Quizplus · Accepted Answer

The indirect method reconciles net income to net cash flow from operating activities by adjusting for non-cash expenses, changes in current assets and liabilities, and other non-operating items. This reconciliation provides insights into the quality of earnings, which refers to how much of the reported earnings are due to actual business operations and how much are due to accounting adjustments or one-time events. Therefore, analysts prefer the indirect method for the preparation of the cash flow statement because it provides a yardstick for measuring the quality of earnings. Choices A, B, and D are not directly related to the preparation of the cash flow statement nor are they affected by the reconciling items in the statement.

Analysts Prefer the Indirect Method for the Preparation of the Cash