3. Overview of direct and indirect methods Evaluate the comments that follow as

Question

3.   Overview of direct and indirect methods
Evaluate the comments that follow as being True or False. If the comment is false, briefly explain why.
a.   Both the direct and indirect methods will produce the same cash flow from operating activities.
b.   Depreciation expense is added back to net income when the indirect method is used.
c.   One of the advantages of using the direct method rather than the indirect method is that larger cash flows from financing activities will be reported.
d.   The cash paid to suppliers is normally disclosed on the statement of cash flows when the indirect method of statement preparation is employed.
e.   The dollar change in the Merchandise Inventory account appears on the statement of cash flows only when the direct method of statement preparation is used.

Explanation / Answer

a. True. Both the direct and indirect methods will produce the same cash flow from operating activities.

b. True. Depreciation expense is added back to net income when the indirect method is used.

c. False. Financing activities are indicated in both indirect and direct methods.

d. False. This sort of transaction would not show up in a statement of cash flows.

e. False. It would show up on the statement of cash flows as a decrease in either method.

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