What is a disadvantage of using the indirect method for stakeholders?

What is a disadvantage of using the indirect method for stakeholders?

• A. It provides too much information
• B. It improves comparison across companies
• C. It includes complex accounting adjustments
• D. It simplifies cash flow predictions

Answer: (C)

Using the indirect method for calculating cash flows from operating activities involves adjusting net income for changes in non-cash items and working capital. This method often requires numerous accounting adjustments for elements such as depreciation, changes in accounts receivable, inventory fluctuations, and changes in accounts payable. The complexity of these adjustments can make it challenging for stakeholders, especially those without financial expertise, to understand the exact sources of cash flow. This can obscure the clarity of the financial performance, making it harder for stakeholders to make informed decisions based on straightforward cash flow information. In contrast, other methods or approaches may present cash flow in a more direct fashion, facilitating easier comprehension. The indirect method's reliance on various accounting entries introduces a layer of complexity that can leave stakeholders confused about a company's actual cash-generating ability.

Using the indirect method for calculating cash flows from operating activities involves adjusting net income for changes in non-cash items and working capital. This method often requires numerous accounting adjustments for elements such as depreciation, changes in accounts receivable, inventory fluctuations, and changes in accounts payable.

The complexity of these adjustments can make it challenging for stakeholders, especially those without financial expertise, to understand the exact sources of cash flow. This can obscure the clarity of the financial performance, making it harder for stakeholders to make informed decisions based on straightforward cash flow information.

In contrast, other methods or approaches may present cash flow in a more direct fashion, facilitating easier comprehension. The indirect method's reliance on various accounting entries introduces a layer of complexity that can leave stakeholders confused about a company's actual cash-generating ability.