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Chapter 14: Q14-15RQ (page 769)

Question: How does the direct method differ from the indirect method when preparing the operating activities section of the statement of cash flows?

Short Answer

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Answer

The direct method is like astatement of profit and loss whereas, the indirect method uses balance sheet items to get results.

Step by step solution

01

Direct method

Under the direct method, each item of the statement of profit and loss is picked up and converted into cash basis from an accrual basis. In short, we can say that the direct method of operating activity is thecash income statement.

02

Indirect method

Indirect method starts with net income then each item if picked from current assets and current liabilities to make adjustments to the net income. The very first step of indirect method is to add depreciation, depletion, and amortization expense in the net income.

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Most popular questions from this chapter

Using a spreadsheet to complete the statement of cash flows— indirect method

Companies can use a spreadsheet to complete the statement of cash flows. Each item that follows is recorded in the transaction analysis columns of the spreadsheet.

  1. Net income
  2. Increases in current assets (other than Cash)
  3. Decreases in current liabilities
  4. Cash payment for acquisition of plant assets
  5. Cash receipt from issuance of common stock
  6. Depreciation expense

Identify each as being recorded by a Debit or Credit in the statement of cash flows section of the spreadsheet

Question: Explain why depreciation expense, depletion expense, and amortization expense are added to net income in the operating activities section of the statement of cash flows when using the indirect method.

Question: Describing the purposes of the statement of cash flows Financial statements all have a goal.

The statement of cash flows does as well. Describe how the statement of cash flows helps investors and creditors perform each of the following functions:

a. Predict future cash flows.

b. Evaluate management decisions.

c. Predict the ability to make debt payments to lenders and pay dividends to stockholders.

Use the Rouse Exercise Equipment data in Exercise E14-23. Prepare the company’s statement of cash flows—indirect method—for the year ended December 31, 2018. Assume investments are purchased with cash.

Question: What accounts on the balance sheet must be evaluated when completing the investing activities section of the statement of cash flows?
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