Sales are a component of cash flow statement 1.True 2.False

Sales are a component of cash flow statement

1.True

2.False

Solutions

Expert Solution

The above statement is partially true. So going with the answer is 2.False as the statement is not completely correct to agree with. Please find the supporting explanation in detail below:

Any kind of business enterprise can determine its first component of cash flow from operating activities for drafting the cash flow statement using two methods -

1. Direct Method

2. Indirect Method

Direct Method: In case of direct method, majority of the gross cash receipts & payments are considered for determining the cash inflow/outlow from operating activities. So here in this method - Cash Sales form an integral part of Cash flow statement for determining the cash flow from operating activities. So from this point of view - Sales form part as a component of cash flow statement.

Indirect Method: In case of indirect Method, net profit or loss is adjusted for transactional effects of non-cash nature, deferrals /accruals , items associated with investing or financing activities. So here in this method - Sales do not form part of the cash flow statement for determining the cash flow from operating activities as indirect method fails to provide break-up of cash flow from operations in detail when compared to the direct method. So from this point of view - Sales do not form part as a component of cash flow statement.

Hence in the viewlight of the above explanation - the given statement is false.

ekkarill92 answered 4 months ago

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