• Explanation

The operating activitiesA section on the statement of cash flows related to all transactions that do not involve investing or financing. In general, these activities involve producing goods and services and delivering them to customers. section of the statement of cash flowsA statement that summarizes changes in a company's cash position by listing the inflows (ie, sources) and outflows (ie, uses) of cash. Cash flow activities are classified as operating, investing, or financing activities. can be prepared using either the direct Presentation of the statement of cash flows using actual cash inflows and outflows related to each account in income from continuing operations. or indirectA presentation of the statement of cash flows that begins with net income or loss, followed by additions to or deductions from that amount for noncash revenue (eg, gains from equipment transactions) and expense items (eg, depreciation expense), resulting in cash flow from operating activities. method.  The indirect method starts with net income (NI), which is reconciled to net cash flow by adjusting for changes in certain operating accounts (eg, current assets and liabilities), noncash items, and nonoperating itemsRevenue and expenses derived from sources that are outside of regular business transactions (eg, gains on sale of assets, dividend revenue) or that are nonrecurring or infrequent (eg, loss from earthquake) but derive from continuing operations (versus discontinued operations)..

When using the indirect method, an increase in a current asset (eg, accounts receivable) is treated as a use of cash because an asset other than cash is received.  Increases are deducted from NI.  Increases/decreases in the allowance for credit losses, a contraAn account that indirectly reduces the value of the account with which it is paired. Each contra account (ie, valuation account) has the opposite normal balance of its related account. For example, allowance for credit losses has a normal credit balance and is a contra account to accounts receivable, which has a normal debit balance. account to A/R, are treated the opposite of changes in A/R.  An increase is added to NI and a decrease is deducted from NI (Choice C).

In this scenario, Blue Co.'s allowance for credit losses increased by $18,000 during the year.  Accordingly, the $18,000 is added to NI in the operating activities section.

(Choice A)  If the direct method is used, changes in the allowance for credit losses are not reported (ie, ignored) because the changes involve noncash transactions (eg, credit loss expense, accounts written off).

(Choice B)  Although supplementary disclosures are required whether the indirect or direct method is used, information about the allowance for credit losses and credit loss expense is not required for either method.

Things to remember:
The indirect method of preparing the operating activities section of the statement of cash flows starts with net income (NI).  NI is reconciled to net cash flow by adjusting for increases and decreases in certain operating accounts (eg, accounts receivable) on the balance sheet.  An increase in the allowance for credit losses (contra account) is added back to NI.