Question

Which method of preparing the Operating Activities section of a statement of cash flows adjusts net income to remove the effects of deferrals and accruals for revenues and expenses?

a.
The direct method

b.
The indirect method

c.
Both the direct and indirect methods

d.
Neither the direct method nor the indirect method

Answer 1

The indirect method of preparing the Operating Activities section of a statement of cash flows adjusts net income to remove the effects of deferrals and accruals for revenues and expenses.

The correct option is b.

Explanation:

The indirect method adjusts net income to remove the effects of deferrals and accruals for revenues and expenses in the Operating Activities section of a statement of cash flows. This method reconciles net income to net cash provided by operating activities by accounting for non-cash expenses, changes in working capital, and other adjustments.

In the direct method, cash transactions are directly listed, while the indirect method starts with net income and adjusts it to derive the operating cash flows.

So, the correct option is b)The indirect method.