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:

Product

An item offered for sale which can be a good, a service, or an idea.

Supply

The total quantity of a good or service that is available for purchase at various price levels in a given market.

Quantity Demanded

The total amount of a good or service that consumers are willing and able to purchase at a specific price level, at a given point in time.

Equilibrium Price

is the price at which the quantity demanded of a good equals the quantity supplied, leading to market balance.