When preparing a direct method statement of cash flows, the principal component of cash flow from operating activities is
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A. B. C. D. E.B
Cash collections is the beginning point and principal component of cash flow from operating activities.
In preparing a direct method statement of cash flows, the principal component of cash flow from operating activities is cash collections. Therefore, the correct answer is B. cash collections.
The statement of cash flows is one of the financial statements that provides information about the cash generated and used by a company during a specific period. It helps in analyzing the sources and uses of cash and assists in assessing the company's liquidity, operating activities, investing activities, and financing activities.
The statement of cash flows can be prepared using either the direct method or the indirect method. The direct method focuses on presenting the specific cash inflows and outflows related to operating activities, while the indirect method starts with net income and adjusts it to arrive at the cash flow from operating activities.
In the direct method, the cash flow from operating activities is calculated by considering the actual cash inflows and outflows from the company's primary operations. It involves identifying the specific cash receipts and payments related to revenues and expenses.
Among the options provided, cash collections represent the primary component of cash flow from operating activities. Cash collections refer to the actual cash received from customers or clients for the goods sold or services rendered. It represents the cash inflow directly associated with the company's core operations.
Let's analyze the other options to understand why they are not the principal component of cash flow from operating activities:
A. the decrease in accounts receivable: While a decrease in accounts receivable may indicate that cash has been collected from customers, it does not directly represent the cash inflows from operating activities. Accounts receivable represents amounts owed by customers, and its decrease alone does not capture the actual cash collections during the period.
C. cash received from short- and long-term borrowings: Cash received from borrowings falls under the category of financing activities, not operating activities. Financing activities include activities related to raising capital, such as issuing debt or equity securities.
D. the increase in accounts payable: Similar to accounts receivable, an increase in accounts payable does not directly represent cash flows from operating activities. Accounts payable represents amounts owed by the company to its suppliers, and an increase in accounts payable does not necessarily indicate cash outflows during the period.
E. net income plus depreciation expense: Net income plus depreciation expense is a common starting point for the indirect method of preparing the statement of cash flows. It is used to adjust net income to arrive at the cash flow from operating activities. However, in the direct method, the principal component is cash collections, as explained earlier.
In summary, when preparing a direct method statement of cash flows, the principal component of cash flow from operating activities is cash collections (Answer B).