Which statement about indirect vs direct cash flow formats is true?

Which statement about indirect vs direct cash flow formats is true?

• A. The direct format shows profit as a line item in operating activities.
• B. The direct format excludes financing activities.
• C. The indirect format starts with net income and adjusts for non-cash items.
• D. Both formats show identical line items in the same order.

Answer: (C)

The operating cash flows narrative is that the indirect method starts with net income and then adjusts for non-cash items and changes in working capital to convert accrual-based net income into cash from operations. This approach reflects how accrual accounting translates into actual cash by removing non-cash charges (like depreciation and amortization) and accounting for the timing differences of receipts and payments. The other formats differ in how they present operating activities—direct shows cash receipts and payments, not profit, and financing activities appear in a separate section in both formats. So starting from net income and adjusting for non-cash items is the correct description of the indirect format.

The operating cash flows narrative is that the indirect method starts with net income and then adjusts for non-cash items and changes in working capital to convert accrual-based net income into cash from operations. This approach reflects how accrual accounting translates into actual cash by removing non-cash charges (like depreciation and amortization) and accounting for the timing differences of receipts and payments. The other formats differ in how they present operating activities—direct shows cash receipts and payments, not profit, and financing activities appear in a separate section in both formats. So starting from net income and adjusting for non-cash items is the correct description of the indirect format.