Question:Most organizations do not choose to present their operating activity cash flows using the
direct method despite preference by FASB. Instead, this information is shown within a statement of cash flows by
means of the indirect method. How does the indirect method of reporting operating activity cash flows differ from
the direct method?
Answer: The indirect method actually follows the same set of procedures as the direct method except that it
begins with net income rather than the business’s entire income statement. After that, the three steps demonstrated
previously are followed although the mechanical process here is different.
1. Noncash items are removed.
2. Nonoperational gains and losses are removed.
3. Adjustments are made, based on the change registered in the various connector accounts, to switch
remaining revenues and expenses from accrual accounting to cash accounting.
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