Question

When the operating activities section of the statement of cash flows is reported using the direct method, the FASB requires:__________.
a. The preparation of the statement of cash flows under the indirect method be completed and reported with the statement of cash flows prepared using the direct method.
b. A reconciliation of net income to net cash provided or used by operating activities.
c. Footnotes to the financial statements disclosing the difference between net income and the cash provided or used by financing activities.
d. The income statement to be prepared under the cash basis of accounting.
e. Noncash investing and financing activities be included in the statement of cash flows.

Answer 1

Answer:

b. A reconciliation of net income to net cash provided or used by operating activities.

Explanation:

FASB is an acronym for Financial Accounting Standards Board. The financial accounting standards board (FASB) is a private, non-profit organization saddled with the responsibility of establishing and maintaining standard financial accounting and reporting for general guidance of individuals such as investors, issuers and auditors. It was founded in 1972 but began operations fully on the 1st of July, 1973 by replacing the Accounting Principles Board (APB) and American Institute of Certified Public Accountants (AICPA).

When the operating activities section of the statement of cash flows is reported using the direct method, the FASB requires a reconciliation of net income to net cash provided or used by operating activities and it should be stated as part of the statement of cash flows or in the footnotes.

A direct method involves the use of the overall accrual-based income statement and converting them sequentially to the cash-basis.

Some examples of operating activities are cash revenue from the sales of a product, cash paid as an expense for merchandise etc.