Two Methods Are Available to Prepare the Operating Activities Section

question 24

Multiple Choice

Two methods are available to prepare the operating activities section of a statement of cash flows.Which of the following statements regarding these two methods is false?

• A) If a company uses the indirect method, it must separately disclose the cash payments made for interest and income taxes.
• B) If a company uses the direct method, it must present a separate schedule which reconciles net income to net cash from operating activities.
• C) Advocates of the direct method believe that the indirect method reveals too much by telling readers gross amounts of cash receipts and cash payments from operations.
• D) The FASB prefers the direct method, while most companies use the indirect method in practice.

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Definitions:

Investment Firm

A company that invests the funds of clients in a variety of assets with the goal of generating financial returns.

Capital Input

Capital input refers to the amount of physical assets used in the production process, including buildings, machinery, and equipment.

Production Process

The series of steps and operations involved in the creation of goods or services.

Inner Loop

In the context of the circular-flow diagram, it refers to the flow of goods and services from firms to households and the corresponding flow of money from households to firms.