CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows I
Which item is most likely to be disclosed only under the direct method, or be separately visible only in that presentation, rather than appearing as a reconciling adjustment?
Cash paid to suppliers and employees is the item characteristic of the direct method, which lists gross operating cash receipts and payments. Depreciation and deferred tax changes are non-cash adjustments used to reconcile net income to operating cash flow in the indirect method.
- ADepreciation expense added back to net income
- BCash paid to suppliers and employeesCorrect
- CChange in deferred tax liabilities
Explanation
The direct method shows major classes of gross operating cash receipts and payments, such as cash paid to suppliers and employees. Depreciation and deferred tax changes are reconciling adjustments typical of the indirect method.
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