Operating activities, as reported using the indirect method on the statement of cash flows, are most closely related to which of the following?

• A. Investing activities such as purchasing equipment
• B. Financing activities like issuing stock
• C. Net income and its adjustments for non-cash items
• D. Changes in equity accounts only

Answer: (C)

Verified step by step guidance

1. Understand the context: The statement of cash flows is divided into three sections: operating activities, investing activities, and financing activities. The indirect method focuses on reconciling net income to cash flows from operating activities.
2. Identify the key concept: Operating activities primarily involve the core business operations, such as revenues and expenses, and adjustments for non-cash items like depreciation, amortization, and changes in working capital accounts (e.g., accounts receivable, accounts payable).
3. Eliminate unrelated options: Investing activities (e.g., purchasing equipment) and financing activities (e.g., issuing stock) are separate sections of the cash flow statement and are not directly related to operating activities.
4. Focus on the correct relationship: The indirect method starts with net income (from the income statement) and adjusts it for non-cash items (e.g., depreciation) and changes in working capital accounts to calculate cash flows from operating activities.
5. Conclude: The correct answer is that operating activities, as reported using the indirect method, are most closely related to net income and its adjustments for non-cash items.