Question

Two methods can be used to construct a statement of cash flows: the direct method and the indirect method. Under the indirect method, data from three financial statements are used. These statements include __________.A. two balance sheets, one statement of cash flows or one balance sheet
B. two statement of cash flow, one income statement or two income statements

Answer 1

Answer:

A. two balance sheets and B. income statement

Explanation:

There are three types of activities in the cash flow statement which are described below:  

1. Operating activities: It includes those transactions which affect the working capital after net income. The increase in current assets and a decrease in current liabilities would be deducted whereas the decrease in current assets and an increase in current liabilities would be added.  

These changes in working capital would be adjusted. Moreover, the depreciation expense is added to the net income and the loss on sale of assets is added whereas the gain on sale of assets is deducted  

2. Investing activities: It records those activities which include purchase and sale of the long term assets. The purchase is an outflow of cash whereas sale is an inflow of cash

3. Financing activities: It records those activities which affect the long term liability and shareholder equity balance. The issue of shares is an inflow of cash whereas redemption and dividend is an outflow of cash.