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What is the primary difference between the direct and indirect methods of calculating cash flow from operations?
The indirect method starts with gross income and adjusts to cash flow from operations.
The direct method starts with sales and follows cash through the income statement.
Balance sheet items are included for the direct method but not for the indirect method.
The direct method results in lower cash flow figures due to item detail.
The correct answer is: The direct method starts with sales and follows cash through the income statement.
The direct method is a way of calculating cash flow from operations that begins with cash received from customers, rather than starting with net income. It involves determining cash inflows and outflows related to operating activities by directly analyzing cash transactions, such as cash collected from sales and cash paid to suppliers. Because it follows the actual cash movement through the income statement, it provides a clear and detailed picture of cash education, making it easier to understand how cash is generated or used during a specific period. In contrast, the indirect method starts with net income and makes adjustments for non-cash transactions and changes in working capital, thus arriving at cash flow from operations indirectly. This method reconciles net income to cash flow by adding back expenses that were recorded but did not involve cash, and subtracting gains that are included in net income but are not cash transactions. The other choices highlight key distinctions that aren't accurate representations of the core difference. For example, the indirect method does not begin with gross income but rather with net income and adjusts for various items; balance sheet items are incorporated in both methods but are treated differently; and the assertion related to cash flow figures being lower with the direct method confuses reporting style with the underlying cash received. Thus, the essence of the direct