Question

Cash flow statement is based upon ______________.

• A. Cash basis of accounting.
• B. Accrual basis of accounting.
• C. Credit basis of accounting.
• D. None of the above.

Answer 1

The correct option is A Cash basis of accounting.

Cash flow is calculated by making certain adjustments to net income by adding or subtracting differences in revenue, expenses and credit transactions resulting from transactions that occur from one period to the next. These adjustments are made because non-cash items are calculated into net income and total assets and liabilities.

So, because not all transactions involve actual cash items, many items have to be reevaluated when calculating cash flow from operations.