Assume That a Company Chooses the Indirect Method to Determine

question 157

Essay

Assume that a company chooses the indirect method to determine net cash flows from operating activities.
Required:
Part a.Explain why net income is the starting point when the indirect method is used to determine cash flows from operating activities.
Part b.Briefly explain why a company's net income is most likely different in amount than its cash flows from operating activities.

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Definitions:

Return on Investment

A measure of the profitability and efficiency of an investment, calculated as the net profit of the investment divided by its initial cost.

Invested Assets

Assets that are acquired for the purpose of generating income or appreciating in value, such as stocks, bonds, and real estate.

Operating Income

This is the income earned from normal business operations, excluding revenue from investments and other non-operational income.

Investment Turnover

A measure of a company’s efficiency in using its assets to generate sales or revenue, indicating how quickly investments are converted into income.