CFA Practice Question

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CFA Practice Question

Which of the following best explains why nearly all public firms present the operating section of the statement of cash flows using the indirect method?

A. It utilizes data already available in a firm's accrual-based accounts.
B. It is the method preferred in SFAS No. 95.
C. It is more easily understood by users.
Correct Answer: A

It is easier to prepare for this reason.

User Contributed Comments 9

User Comment
synner i thought it was because they wanted to make everyone's life harder!
Sandy69 Note SFAS No. 95 recommends Direct Method usage
cbb1 No, SFAS 95 does not indicate that direct is "preferrable"; both are acceptable. ISAC standards recommends use of direct method.
Rotigga Another way of saying it is that the indirect method does not reveal any new operational information; the direct method would be exploited by competitors who read their rivals' financials.
surjoy Also if you prepare Cash Flows in Direct method, you have to present Indirect method in footnote. But if you prepare Cash Flows in Indirect method there is not need to provide direct method in footnote.
Drzewes Surjoy, that would mean that when you prepare financial statement with additional information you have to prepare additionaly a document summarizing already known data, BUT, if you are lazy then you only prepare the document summarizing already known data and then as a reward you dont have to prepare additional information.
Dont you just love this? :)
johntan1979 That's not the REAL reason ;)
ascruggs92 The direct method doesn't really provide you with any more information than the indirect method. If there is a metric you want to look at from the direct method, you can easily reconcile the indirect statement to make it direct. Just don't get the impression that companies are hiding anything by not showing the direct method, because there isn't really a way to hide it.

The Direct Method is simply a cash income statement instead of an accrual income statement, and I honestly think indirect is more useful considering the context it's used in. I can also understand why companies don't ever prepare a direct statement if it requires them also disclosing an indirect, it's just a waste of time at that point.
chesschh Sounds bad, but synner's reason is also correct!
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