Question

Greer Company prepares its statement of cash flows using the direct method. How should Greer present the reconciliation between net income and cash from operating activities?

1) As a separate section in the statement of cash flows
2) As a note to the financial statements
3) As an adjustment to net income in the income statement
4) As a disclosure in the footnotes to the financial statements

Answer 1

Greer Company should present the reconciliation between net income and cash from operating activities as a disclosure in the footnotes to the financial statements in the statement of cash flows prepared using the direct method.

Step-by-step explanation:

In the statement of cash flows prepared using the direct method, Greer Company should present the reconciliation between net income and cash from operating activities as a disclosure in the footnotes to the financial statements. This is because the direct method does not explicitly show the reconciliation in the main body of the statement.

The reconciliation in the footnotes typically explains the adjustments made to the net income figure to arrive at the cash from operating activities. It may include information such as changes in non-cash working capital items, non-operating items, and any significant adjustments needed to convert from accrual basis to cash basis.

For example, if Greer Company reports depreciation expense in the income statement, the reconciliation in the footnotes would show the adjustment to add back depreciation to net income because it is a non-cash expense.