You Are on a Team Responsible for Addressing Cash Flow

question 144

Essay

You are on a team responsible for addressing cash flow problems with other managers in your corporate division.Your accounting department has provided the statement of cash flows prepared using the indirect method.At your first meeting, some of the managers have expressed concerns about the statement's understandability and do not view the statement as anything other than a "rearranged income statement".The managers have requested that your team explain to them how the statement is constructed.
Required:
a.Explain to your managers why the indirect method is a useful approach to reporting cash flows from operating activities.
b.Explain to your managers why increases in current assets are subtracted from net income and increases in current liabilities are added to net income to calculate the cash flow provided by operating activities.
c.Explain to your managers any differences between the indirect method and the direct method of preparing the investing and financing sections of the statement of cash flows.

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Definitions:

Semantic Isomorphism

A concept in semantic theory suggesting a one-to-one correspondence between the structure of a sentence and its meaning.

Ambiguity

The presence of two or more possible meanings within a single word or phrase, leading to uncertainty or interpretation.

Family Resemblance

A concept referring to the way in which members of a family share common characteristics, making them recognizable as part of the same group, but without necessarily having a single common feature.

Passive Sentence

A sentence structure where the subject of the sentence is the recipient of an action rather than the doer.