When evaluating cost-cutting proposals, how are operating cash flows typically affected under the indirect method of the statement of cash flows?

• A. Operating cash flows decrease since cost-cutting proposals reduce cash collections from customers.
• B. Operating cash flows decrease because cost-cutting always leads to higher depreciation expenses.
• C. Operating cash flows are unaffected by cost-cutting proposals under the indirect method.
• D. Operating cash flows increase if cost-cutting reduces operating expenses, as net income rises and non-cash adjustments remain unchanged.

Answer: (D)

Verified step by step guidance

1. Understand the indirect method of the statement of cash flows: This method starts with net income and adjusts for non-cash items and changes in working capital to calculate operating cash flows.
2. Recognize the impact of cost-cutting proposals: Cost-cutting typically reduces operating expenses, which increases net income. Since net income is the starting point for the indirect method, this increase will positively affect operating cash flows.
3. Consider non-cash adjustments: Under the indirect method, non-cash adjustments (e.g., depreciation) are added back to net income. If cost-cutting does not affect these adjustments, they remain unchanged.
4. Analyze changes in working capital: Cost-cutting proposals may also influence working capital (e.g., accounts payable or inventory). However, if these changes are minimal, the primary effect on operating cash flows will come from the increase in net income.
5. Conclude that operating cash flows increase: When cost-cutting reduces operating expenses, net income rises, and non-cash adjustments remain unchanged, leading to an increase in operating cash flows under the indirect method.