1. There are two principal methods of presenting cash flow from operating activities—the direct method and the
indirect method. Describe these two methods.
2. Depreciation expense, amortization of patents, and amortization of bond discount are examples of items that are added to net income when using the indirect method of presenting cash flows from operating activities. Amortization of premium on bonds and a reduction in deferred taxes are examples of items that are deducted from net income when using the indirect method of presenting cash flows from operating activities. Explain why these adjustments to net income are made to compute cash flows from operating activities.
3. What is the meaning of the term cash in the statement of cash flows?
4. What is the purpose of the statement of cash flows?
5. Why is it important to disclose certain noncash investing and financing transactions, such as exchanging common stock for land?