Which cash flow method starts with net income and adjusts for changes to arrive at operating cash flows?

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Master the UCF ACG2021 Principles of Financial Accounting Final Exam. Study with comprehensive practice tests, flashcards, and multiple choice questions, each with detailed explanations. Ace your exam!

The indirect cash flow method is a way of preparing the cash flow statement that begins with net income, which is derived from the income statement. This method subsequently adjusts for non-cash transactions, changes in working capital, and other factors to provide a clearer picture of cash generated or used in operations.

Starting with net income is beneficial because it reflects the company's profitability as reported on the income statement. Adjustments are then made to convert that net income into cash flow from operating activities by considering various factors such as depreciation, changes in accounts receivable, accounts payable, and inventory levels. These adjustments help clarify the actual cash movements, ensuring that non-cash items do not distort the cash flow.

Other methods, such as the direct cash flow method, do not begin with net income; instead, they report cash receipts and payments directly, leading to a different approach altogether. The concepts of free cash flow and net cash flow methods focus on different aspects of cash management and reporting, but they do not specifically involve starting from net income as the indirect method does. Hence, the indirect cash flow method is the correct choice for the given question.