Preparing a Direct Method Statement of Cash Flows

D

Using the direct method, the net cash flow must equal the change in cash.

When preparing a direct method statement of cash flows, the net cash flow must equal the answer choice that accurately represents the components included in the statement. Let's analyze each answer choice:

A. the cash collections minus the cash expenses. This answer choice implies that only cash collections and cash expenses are considered, without taking into account other cash flow components such as noncash revenues and expenses or changes in operating accounts. Therefore, it is not a comprehensive representation of the net cash flow and is unlikely to be the correct answer.

B. the cash collections plus the net noncash revenues and expenses. This answer choice suggests that the net cash flow includes cash collections as well as net noncash revenues and expenses. Net noncash revenues and expenses refer to items that impact the income statement but do not involve the actual receipt or payment of cash, such as depreciation or amortization. Including these noncash items in the net cash flow calculation would make it more comprehensive and accurate.

C. the cash flow from operations plus the cash flow from investments. This answer choice states that the net cash flow is equal to the sum of cash flow from operations and cash flow from investments. Cash flow from operations represents the cash generated or used in the company's core operations, while cash flow from investments represents the cash flows related to the acquisition or sale of long-term assets or investments. Combining these two components would give a broader representation of the net cash flow.

D. the change in cash. This answer choice suggests that the net cash flow is equivalent to the change in cash. While the change in cash is an important component of the statement of cash flows, it does not capture the complete picture of the underlying cash flows from various activities of the business.

E. the cash collections plus the changes in the operating accounts. This answer choice includes cash collections and changes in the operating accounts. Operating accounts generally refer to current assets and current liabilities related to the company's operations, such as accounts receivable, accounts payable, and inventory. Changes in these accounts affect the cash flow of a business. Including these changes in the net cash flow calculation would provide a more accurate representation of the overall cash flow.

Based on the explanations provided, the most comprehensive and accurate representation of net cash flow is option B: the cash collections plus the net noncash revenues and expenses. This answer choice considers both cash collections and noncash items, which gives a more complete view of the net cash flow.