Asked by Daman Preet Dhillon on Apr 30, 2024
Verified
Cash flows from operating activities can be calculated using the indirect or direct method. Briefly describe how the two methods differ yet arrive at the same information about the net cash flows from operating activities.
Indirect Method
A way of preparing cash flow statements where net income is adjusted for non-cash transactions, deferrals, and accruals.
Direct Method
An approach to preparing the cash flow statement where actual cash flows from operating activities are disclosed, as opposed to the indirect method which adjusts net income for non-cash transactions.
Operating Activities
Activities related to the core business functions of a company, including production, sales, and delivery of services, as reflected in its cash flow.
- Comprehend the processes involved in formulating the statement of cash flows through both indirect and direct methodologies.
Verified Answer
Under the direct method net cash provided by operating activities is computed by adjusting each item in the income statement from the accrual to the cash basis. Within the operating activities section only major classes of operating cash receipts and cash payments are reported. The classes include cash receipts from customers and cash payments to suppliers. The difference between these major classes is the net cash provided by operating activities.
Learning Objectives
- Comprehend the processes involved in formulating the statement of cash flows through both indirect and direct methodologies.
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