What is a key feature of the indirect method for the statement of cash flows?

• A. Starts with net income and adjusts for non-cash items and changes in working capital
• B. Lists cash flows directly
• C. Excludes depreciation
• D. Only reports investing activities

Answer: (A)

The indirect method starts with net income and converts it to cash from operating activities by adding back non-cash items (like depreciation and amortization) and adjusting for changes in working capital (such as accounts receivable, inventories, and accounts payable). This approach shows how accrual net income becomes cash, focusing on how operating activities affect cash through non-cash charges and shifts in working capital. The direct method, not this one, lists cash inflows and outflows from operating activities. Depreciation is a non-cash expense that is added back, not excluded. The method does not focus only on investing activities, which are reported separately.