A Cash Flow Statement Using the Indirect Method

D

Because of the indirect format, it is not possible to compare operating cash inflows and outflows by function with the revenue and expense activities that generated them.

The correct answer is C. A cash flow statement using the indirect method uses major categories of gross cash receipts and payments.

The cash flow statement is a financial statement that provides information about the cash inflows and outflows of a company during a specific period. It is an essential tool for assessing a company's liquidity, solvency, and financial performance. The cash flow statement can be prepared using either the direct method or the indirect method.

The indirect method, which is the focus of this question, starts with the company's net income (as reported in the income statement) and adjusts it for non-cash items and changes in working capital to determine the cash flows from operating activities. The other two categories of cash flows, investing activities, and financing activities, are presented separately and include the cash flows related to investments and financing transactions, respectively.

Now let's analyze the given options:

A. is as informative as using the direct method. This statement is incorrect. The direct method provides a more detailed breakdown of cash inflows and outflows, specifically identifying the cash collections from customers and the cash payments to suppliers and employees. It is considered more informative than the indirect method, which makes adjustments to net income.

B. begins with a firm's cash collections. This statement is incorrect. The direct method begins with a firm's cash collections, not the indirect method. The indirect method starts with net income.

C. uses major categories of gross cash receipts and payments. This statement is correct. The indirect method of preparing the cash flow statement uses major categories of gross cash receipts and payments. It involves adjusting the net income for non-cash items (such as depreciation and amortization) and changes in working capital (such as accounts receivable, accounts payable, and inventory) to arrive at the cash flows from operating activities.

D. provides little new information into a firm's cash-generating ability. This statement is incorrect. While the indirect method may not provide as detailed information as the direct method, it still offers valuable insights into a firm's cash-generating ability. It helps investors and analysts understand the cash flows from operating activities, which are critical for assessing a company's ability to generate cash and sustain its operations.

In summary, the correct answer is C. A cash flow statement using the indirect method uses major categories of gross cash receipts and payments.