Both the direct and indirect methods of reporting cash flows from operating activities include which of the following items?

• A. Cash received from issuing stock
• B. Adjustments for depreciation expense
• C. Cash flows from investing activities
• D. Net cash provided by (or used in) operating activities

Answer: (D)

Verified step by step guidance

1. Understand the purpose of the statement of cash flows: It is used to report cash inflows and outflows categorized into operating, investing, and financing activities. The focus here is on operating activities.
2. Learn the difference between the direct and indirect methods: Both methods report net cash provided by (or used in) operating activities, but they differ in presentation. The direct method lists specific cash inflows and outflows, while the indirect method starts with net income and adjusts for non-cash items and changes in working capital.
3. Identify items included in operating activities: Operating activities include transactions related to the core business operations, such as cash receipts from customers, cash payments to suppliers, and adjustments for non-cash expenses like depreciation.
4. Exclude items not related to operating activities: Cash received from issuing stock is a financing activity, and cash flows from investing activities are reported separately under investing activities. These are not included in operating activities.
5. Recognize adjustments for depreciation expense: Depreciation is a non-cash expense that reduces net income but does not affect cash flow. Under the indirect method, it is added back to net income to calculate net cash provided by operating activities.