Which statement describes the indirect method for presenting cash flow from operations?

• A. Starts with net income and adjusts for non-cash items and working capital; reveals cash generated from operating activities.
• B. Starts with cash from customers and ignores non-cash items.
• C. Starts with financing cash flows and adjusts for taxes.
• D. Starts with gross profit and adds back interest.

Answer: (A)

The indirect method for cash flow from operating activities starts with net income and then adjusts for non-cash items (like depreciation and amortization) and changes in working capital to arrive at cash provided by operating activities. This approach shows how accrual-based net income is converted to actual cash, by adding back non-cash expenses and accounting for movements in current assets and liabilities.

The other descriptions don’t fit because they misstate how operating cash flow is derived: starting with cash receipts from customers and ignoring non-cash items isn’t how the indirect method works; starting with financing cash flows pertains to financing activities, not operations; and starting with gross profit and adding back interest doesn’t reflect the standard adjustment process used to derive operating cash flow.