An entity’s cash flows from operating activities can be derived and reported by either the direct method or the indirect method. FASB expressed preference for the direct method but the indirect method is used by most businesses in the United States. The process begins with the income for the period (the entire income statement for the direct method but just net income for the indirect method). Noncash items and nonoperating gains and losses are eliminated entirely. In the direct method, the remaining revenue and expense accounts are individually converted into cash figures. For each, the change in one or more related balance sheet connector accounts is taken into consideration. Thus, the reported U.S. GAAP (accrual accounting) figures can be turned into the underlying cash inflows and outflows for reporting purposes.
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