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Operating Activities: Indirect Method quiz #1 Flashcards

Operating Activities: Indirect Method quiz #1
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  • What is the first step in calculating operating cash flows using the indirect method?
    The first step is to start with net income from the income statement.
  • Why are non-cash expenses like depreciation added back to net income in the indirect method?
    Non-cash expenses are added back because they reduce net income but do not involve actual cash outflow.
  • How are gains and losses on the sale of assets treated in the indirect method of calculating operating cash flows?
    Gains are subtracted from net income and losses are added back because they affect net income but are not cash transactions.
  • What is the effect of an increase in current assets (excluding cash) on operating cash flows under the indirect method?
    An increase in current assets is subtracted from net income because it represents a cash outflow.
  • How does a decrease in current liabilities affect the calculation of operating cash flows using the indirect method?
    A decrease in current liabilities is subtracted from net income because it indicates a cash outflow.
  • Why is the indirect method commonly used for calculating operating cash flows?
    The indirect method is commonly used because it is emphasized in academic settings and starts with net income, making it easier to reconcile with the income statement.
  • What is the purpose of adjusting net income for changes in working capital in the indirect method?
    Adjusting for changes in working capital ensures that only cash-based transactions are reflected in operating cash flows.
  • How are decreases in current assets (excluding cash) handled in the indirect method?
    Decreases in current assets are added to net income because they represent a cash inflow.
  • Do the indirect and direct methods affect the calculation of investing and financing cash flows?
    No, both methods only affect operating cash flows; investing and financing activities are calculated the same way regardless of the method used.
  • What is the overall goal of the indirect method when preparing the statement of cash flows?
    The goal is to adjust net income for non-cash items and changes in working capital to determine net cash flow from operating activities.