Question

Which of the following methods of reporting net income from cash flows requires that each item on the income statement be converted from accrual basis to cash basis?

1) direct method
2) indirect method
3) allowance method
4) accrual method

Answer 1

The correct answer is option 1) .The direct method of reporting net income from cash flows requires converting each item on the income statement from accrual to cash basis.

Step-by-step explanation:

The method of reporting net income from cash flows that requires each item on the income statement to be converted from the accrual basis to the cash basis is the direct method.

With the direct method, each component of net income is derived directly from cash receipts and cash payments. This method provides a more detailed and transparent view of the company's cash flows.

On the other hand, the indirect method reconciles net income to obtain net cash flow from operating activities by adjusting for non-cash items and changes in working capital. It does not convert each item on the income statement from accrual to cash basis.