GAAP Allows the Use of Either the Direct or Indirect

question 42

True/False

GAAP allows the use of either the direct or indirect method but prefers the direct method. Companies who use the indirect method must also include a separate schedule reconciling net income to net cash flow provided by operating activities.

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Definitions:

Lockbox Plan

A cash management tool in which incoming cheques for a firm are sent to post office boxes rather than to corporate headquarters. A local bank will collect the contents of the lockbox and deposit the cheques into the company’s local account.

Net Positive Float

The excess of funds available for use due to the time difference between when a check is deposited and when it clears.

JIT System

Just-In-Time System, an inventory management strategy that aligns raw-material orders directly with production schedules.

Accounts Payable

The amounts a company owes to its suppliers or vendors for goods or services received but not yet paid for; a liability on the balance sheet.