Final answer:
According to the Financial Accounting Standards Board (FASB) rules, firms may use either the direct method or the indirect method to calculate and present cash flow from operating activities. Option 1 is correct.
Step-by-step explanation:
The choice between these two methods affects how the cash flows are reported in the statement of cash flows, which is part of a company's financial statements.
The direct method involves listing all the major operating cash receipts and payments during the period to calculate the net cash provided by operating activities. This method provides more detail about the cash flows from operating activities.
The indirect method, on the other hand, starts with net income as reported on the income statement. From there, non-cash items are adjusted, and changes in working capital accounts are accounted for to arrive at the net cash provided by operating activities. While less detailed, it is the more commonly used method because it's easier to prepare and ties closely to the accrual-based income statement.
Option 1 is correct.