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 includes all non - cash activities, whereas the direct method includes only the cash 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 and the direct method will produce a different amount of net cash provided by investing activities

Explanation:

• Option A: Both methods account for cash activities; non - cash activities are disclosed separately, not included in the cash flow calculation by either method in the same way. So A is wrong.
• Option B: The indirect method of preparing the statement of cash flows for operating activities starts with net income and adjusts for non - cash items, changes in working capital, etc., to arrive at net cash provided by (used for) operating activities. This is a correct description.
• Option C: The investing activities section of the statement of cash flows includes the same types of cash flows (e.g., cash flows from purchase/sale of long - term assets) in both direct and indirect methods. So C is wrong.
• Option D: Both methods should result in the same amount of net cash provided by investing activities as they are based on the same underlying transactions. So D is wrong.

Answer:

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