Chapter 1 Exercise 4: 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.
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