Lyle McGee had been the chief accountant at L & B Corporation for well over 20 years. He routinely omitted noncash investing and financing activities from the statement of cash flows, even when they were significant events. When a junior accountant who had just been hired questioned this practice, Lyle told her that it doesn’t make any difference how significant an item is “if it doesn’t involve cash. Besides, we’re a small company and our stockholders are only interested in the bottom line.”

1. Is it possible that Lyle thinks he is treating the significant noncash investing and financing activities properly?

2. If you were the junior accountant, what would you do?

3. Suppose that Lyle wants the junior accountant to give him a refresher course on the statement of cash flows. Write a brief memo to Lyle explaining the purpose of the statement of cash flows. Include a description of both the direct and indirect methods. Also, explain the importance of including significant noncash investing and financing activities.

4. In groups of two or three, discuss which method of preparing the statement of cash flows is easier for you to understand, the direct or the indirect, and why.