Question

Which of the following methods must be followed in preparing a statement of cash flows for a governmental college or university?

A) The indirect method.
B) The direct method.
C) Either the direct or indirect method.
D) The worksheet method.

Answer 1

The statement of cash flows for a governmental college or university must be prepared using the indirect method. The process involves starting with net income, adjusting for non-cash items and changes in working capital, and considering cash flows from investing and financing activities.

Step-by-step explanation:

The statement of cash flows for a governmental college or university

When preparing a statement of cash flows for a governmental college or university, the indirect method must be followed. The indirect method starts with net income and then adjusts for non-cash items and changes in working capital.

Here are the steps involved in preparing the statement of cash flows:

1. Start with net income: Net income is the starting point for the statement of cash flows.
2. Add back non-cash expenses: Non-cash expenses, such as depreciation and amortization, are added back to net income since they do not impact the cash flow.
3. Adjust for changes in working capital: Changes in working capital, including accounts receivable, accounts payable, and inventory, are adjusted to reflect the cash flow impact.
4. Add or subtract cash from investing and financing activities: Cash inflows and outflows from investing and financing activities are added or subtracted to arrive at the final cash flow.

By following these steps, a governmental college or university can accurately prepare a statement of cash flows to analyze its cash flow position.