Question

The income statement is reconstructed on a cash basis from top to bottom when the ________ method is used to prepare the operating activities section of the statement of cash flows.

Answer 1

Direct method

Step-by-step explanation:

There are three types of activities in the cash flow statement under the direct method

1. Operating activities: It records those transactions which are related to the cash receipts and cash payments.

Like:

Cash flow from Operating activities

Collections from customers

Less: Cash paid to suppliers and employees

Less: Interest and taxes paid

Net Cash flow from Operating activities

2. Investing activities: It records those activities which include purchase and sale of the long term assets

3. Financing activities: It records those activities which affect the long term liability and shareholder equity balance.