Which of the following best describes the direct method of reporting operating cash flows on the statement of cash flows?

• A. It adjusts net income for changes in non-cash working capital accounts.
• B. It lists major classes of gross cash receipts and payments from operating activities.
• C. It combines cash flows from all activities into a single total.
• D. It reports only investing and financing cash flows, not operating cash flows.

Answer: (B)

Verified step by step guidance

1. Understand the purpose of the direct method: The direct method of reporting operating cash flows focuses on presenting the actual cash inflows and outflows from operating activities, rather than starting with net income and adjusting for non-cash items.
2. Identify the key feature of the direct method: It lists major classes of gross cash receipts (e.g., cash received from customers) and gross cash payments (e.g., cash paid to suppliers or employees) related to operating activities.
3. Differentiate from the indirect method: Unlike the indirect method, which adjusts net income for changes in non-cash working capital accounts and non-cash expenses, the direct method directly reports cash transactions.
4. Eliminate incorrect options: The direct method does not combine cash flows from all activities into a single total, nor does it exclude operating cash flows. These descriptions are incorrect.
5. Select the correct description: The correct answer is the option that states, 'It lists major classes of gross cash receipts and payments from operating activities,' as this aligns with the definition of the direct method.