Economics · Cash Flow Statement
Which of the following statements provides the most accurate distinction between the Direct and Indirect methods of reporting cash flows from operating activities as prescribed by Accounting Standard (AS) 3?
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- 1The Direct method identifies and lists the major classes of actual cash receipts and cash payments, while the Indirect method determines the net cash flow by adjusting the net profit or loss for non-cash items.✓
- 2The Indirect method involves subtracting non-cash charges like depreciation from the net profit figure to ensure that the reported cash flow reflects only the movements of physical currency.
- 3Under the Indirect method, the enterprise reports major classes of gross cash receipts and payments, which provides a clearer picture of the actual cash inflows from customers.
- 4The Direct method is the more commonly used approach in accounting practice because it begins with the net profit and applies adjustments for non-cash charges to reconcile with the cash book.
Correct answer
The Direct method identifies and lists the major classes of actual cash receipts and cash payments, while the Indirect method determines the net cash flow by adjusting the net profit or loss for non-cash items.
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