Question

Which method of calculating cash flow from operations requires the adjustment of net income for deferrals, accruals, noncash, and nonoperating expenses?

(a) The direct method.
(b) The indirect method.
(c) The inflow method.
(d) The outflow method.

Answer 1

The indirect method requires the adjustment of net income for deferrals, accruals, noncash, and nonoperating expenses.

Step-by-step explanation:

The method of calculating cash flow from operations that requires the adjustment of net income for deferrals, accruals, noncash, and nonoperating expenses is the indirect method.

The indirect method starts with net income and adjusts it by adding back noncash expenses, such as depreciation and amortization, and subtracting nonoperating expenses. It also adjusts for deferrals and accruals, which represent changes in cash flow from changes in working capital.

For example, if a company reported a net income of $100,000 but had $20,000 in depreciation and $10,000 in interest expenses, the indirect method would start with $100,000 and add back $20,000 for depreciation and subtract $10,000 for interest expenses to arrive at the cash flow from operations.