CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows I
An analyst converts a company's cash flow statement from the direct method to the indirect method under IFRS. Which item is most likely to be the starting point of the indirect reconciliation?
The indirect method starts with net income (profit or loss) and adjusts it for non-cash charges, gains and losses, and working capital changes to arrive at operating cash flow. Cash collected from customers and cash paid to suppliers are direct-method line items, not starting points.
- ACash collected from customers
- BNet income (profit or loss)Correct
- CCash paid to suppliers
Explanation
The indirect method begins with net income (profit or loss) and adjusts for non-cash items and changes in working capital to reach operating cash flow. The direct method instead begins with cash receipts and payments such as cash collected from customers and cash paid to suppliers.
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