Question

Regarding the direct and indirect methods of preparing the statement of cash​ flows, which of the following statements is​ true? A. The indirect method and the direct method will produce a different amount of net cash provided by investing activities. B. The indirect method starts with net income and adjusts it to net cash provided by​ (used for) operating activities. C. The direct and indirect methods include different types of cash flows in the investing activities section. D. The indirect method includes all​ non-cash activities, whereas the direct method includes only the cash activities

Answer 1

Answer:

B. The indirect method starts with net income and adjusts it to net cash provided by​ (used for) operating activities.

Explanation:

The cash flow statement shows the entire cash flow for the period in consideration, generally a financial year.

This statement is divided in three parts: Operating, Investing and Financing.

There are two methods to prepare the cash flow statement: Direct Method and Indirect Method.

There is no difference in reporting investing and financing activity, whereas the operating activities are reported in different manners.

Under indirect method, the net income is adjusted to calculate the operating cash flow, all the transactions which are non cash or do not relate to operating activities.

Thus, statement B is correct.