Question

Which of the following statements about preparation of the statement of cash flows is correct?

A. GAAP allows the direct method only.
B. Although GAAP allows either method for the preparation of the operating activities section of the statement of cash flows, the indirect method must be used to prepare the investing activities section of the statement of cash flows.
C. GAAP allows the indirect method only.
D. GAAP allows either the indirect or direct method.

Answer 1

The correct answer is that GAAP allows either the indirect or direct method for preparing the statement of cash flows operating section, with the investing and financing sections being free for any method.

Step-by-step explanation:

The correct statement about the preparation of the statement of cash flows is D. GAAP allows either the indirect or direct method. The operating activities section can be prepared using either method, but regardless of the method chosen for the operating activities, companies are free to choose any method for the investing and financing activities sections

However, if a company chooses the direct method for the operating section, the Financial Accounting Standards Board (FASB) also requires that a reconciliation of net income to net cash provided by operating activities (which is essentially the indirect method) be provided.