In practice, companies who use the direct method in presenting cash flows from operations:
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A. B. C. D.A
The advantage of the indirect method is it reconciles differences between net income and cash flows from operating activities.
The correct answer to the question is A. In practice, companies who use the direct method in presenting cash flows from operations must also disclose cash flows from operations using the indirect method.
The direct method and indirect method are two approaches used to present the cash flows from operations section of the statement of cash flows. The direct method reports actual cash receipts and cash payments, while the indirect method starts with net income and makes adjustments to convert it to cash flows from operations.
When a company chooses to use the direct method, it provides a more detailed breakdown of cash inflows and outflows from various operating activities. This includes reporting cash receipts from customers, cash payments to suppliers and employees, and other cash flows directly associated with the company's core operations.
However, the Financial Accounting Standards Board (FASB) requires that if a company uses the direct method, it must also disclose the indirect method in the footnotes or supplementary information. This is to ensure comparability and facilitate analysis across different companies that may use different presentation methods.
The indirect method reconciles net income to cash flows from operations by adjusting for non-cash items, such as depreciation and amortization, changes in working capital accounts, and other non-operating items. It provides a more concise summary of the operating cash flows by starting with net income and adjusting it to cash flows.
In summary, while a company may choose to present its cash flows from operations using the direct method, it must still provide supplementary information or footnotes that reconcile the direct method to the indirect method. This requirement ensures consistency and allows users of financial statements to understand the cash flows from operations using either approach.