Distinguish between the direct method and indirect method for the cash flow statement.

Distinguish between the direct method and indirect method for the cash flow statement.

• A. Direct method reports cash receipts and payments; indirect method starts with net income and adjusts for noncash items and changes in working capital.
• B. Direct method reports cash receipts and payments; indirect method starts with net income and adjusts for noncash items.
• C. Direct method reports noncash items; indirect method reports cash transactions.
• D. Indirect method is used for operating activities; direct method is for financing activities.

Answer: (A)

The main idea here is how the cash flow statement converts accrual accounting into cash flow from operations. The direct method shows actual cash inflows and outflows from operating activities—cash receipts from customers and cash payments to suppliers, employees, and others. The indirect method starts with net income and adjusts it to cash flow from operating activities by adding back noncash expenses (like depreciation), subtracting gains, and adjusting for changes in working capital accounts such as accounts receivable, inventory, and accounts payable. That description matches the option that states: the direct method reports cash receipts and payments; the indirect method starts with net income and adjusts for noncash items and changes in working capital. It’s the best choice because it accurately reflects how each method handles operating activities. The other statements are incomplete or incorrect: one misstates that the indirect method only adjusts for noncash items, another incorrectly says the direct method reports noncash items, and another wrongly assigns the methods to operating versus financing activities.

The main idea here is how the cash flow statement converts accrual accounting into cash flow from operations. The direct method shows actual cash inflows and outflows from operating activities—cash receipts from customers and cash payments to suppliers, employees, and others. The indirect method starts with net income and adjusts it to cash flow from operating activities by adding back noncash expenses (like depreciation), subtracting gains, and adjusting for changes in working capital accounts such as accounts receivable, inventory, and accounts payable.

That description matches the option that states: the direct method reports cash receipts and payments; the indirect method starts with net income and adjusts for noncash items and changes in working capital. It’s the best choice because it accurately reflects how each method handles operating activities. The other statements are incomplete or incorrect: one misstates that the indirect method only adjusts for noncash items, another incorrectly says the direct method reports noncash items, and another wrongly assigns the methods to operating versus financing activities.