CFA Practice Question
In the 'indirect method' for computing cash flow from operations:
A. add all cash inflows from operating activities and subtract all cash inflows from operating activities (including interest paid).
B. start with total cash flows and subtract cash flow from investing and cash flow from financing.
C. start with net income per the income statement, reverse out entries to income and expense accounts that do not involve a cash movement.
Explanation: In preparing the cash flows from operating activities section under the indirect method, you start with net income per the income statement, reverse out entries to income and expense accounts that do not involve a cash movement, and show the change in net working capital. Entries that affect net income but do not represent cash flows could include income you have earned but not yet received, amortization of prepaid expenses, accrued expenses, and depreciation or amortization.
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