Which statement describes the indirect method for presenting cash flow from operations?

Which statement describes the indirect method for presenting cash flow from operations?

• A. Starts with net income and adjusts for non-cash items and working capital; reveals cash generated from operating activities.
• B. Starts with cash from customers and ignores non-cash items.
• C. Starts with financing cash flows and adjusts for taxes.
• D. Starts with gross profit and adds back interest.

Answer: (A)

The indirect method for cash flow from operating activities starts with net income and then adjusts for non-cash items (like depreciation and amortization) and changes in working capital to arrive at cash provided by operating activities. This approach shows how accrual-based net income is converted to actual cash, by adding back non-cash expenses and accounting for movements in current assets and liabilities. The other descriptions don’t fit because they misstate how operating cash flow is derived: starting with cash receipts from customers and ignoring non-cash items isn’t how the indirect method works; starting with financing cash flows pertains to financing activities, not operations; and starting with gross profit and adding back interest doesn’t reflect the standard adjustment process used to derive operating cash flow.

The indirect method for cash flow from operating activities starts with net income and then adjusts for non-cash items (like depreciation and amortization) and changes in working capital to arrive at cash provided by operating activities. This approach shows how accrual-based net income is converted to actual cash, by adding back non-cash expenses and accounting for movements in current assets and liabilities.

The other descriptions don’t fit because they misstate how operating cash flow is derived: starting with cash receipts from customers and ignoring non-cash items isn’t how the indirect method works; starting with financing cash flows pertains to financing activities, not operations; and starting with gross profit and adding back interest doesn’t reflect the standard adjustment process used to derive operating cash flow.