Chapter 12, Problem 22Q

To determine

Direct method: This method uses the basis of cash for preparing the cash flows of statement.

Cash flows from operating activities: In this direct method, cash flow from operating activities is computed by using all cash receipts and cash payments during the year.

1. A. Cash Receipts: It encompasses all the cash receipts from sale of goods and on account receivable.
2. B. Cash Payments: It encompasses all the cash payments that are made to suppliers of goods and all expenses that are paid.

To explain: the reason why depreciation expenses not reported in cash flow from operating activities under direct method.