ACC 291
Direct and Indirect Cash Flow
Cassandra Stewart
ACC 291
June 18, 2014
Susan Schulz
/
Direct and Indirect Cash Flow
Differences between direct and indirect cash flow are just what they seem. Direct statement of cash flow identifies a company’s sources and uses of cash. This cash flow has three sections that include operating, investing, and financing activities. Operating activities includes receipts and payments from normal business operations. Investing activities include the purchase or sale of long-term asset and investments. Financing activities relate to borrowing money and making payments to creditors and investors. Now Indirect cash flow does not include the amount of information that direct cash flow does. Companies prepare the indirect statement by starting with net income as it was reported in the income statement. Adjustments are made for non-cash items. The indirect preparation method takes an accrual-based income statement and converts it to a cash-basis income statement.
The Financial Accounting Standards Board prefers to use the direct statement of cash flow. They use this method instead of the indirect cash flow because the business stakeholders find that it is easier to read. Companies like to use the indirect approach because it is easier to prepare since the information is already accessible. I personally prefer the indirect approach just because it is simpler to prepare. A lot of companies decide to use the indirect method over the direct method because in the FAS 95 it requires companies to submit supplemental report similar to the indirect method if the company decides to use the direct method.
For preparing the direct method you have to find the cash flows from operating activities, investing activities and financing activities; which can be a long process. The direct method uses the balance sheet and net income and then decreases all non-cash assets.
Cassandra Stewart
ACC 291
June 18, 2014
Susan Schulz
/
Direct and Indirect Cash Flow
Differences between direct and indirect cash flow are just what they seem. Direct statement of cash flow identifies a company’s sources and uses of cash. This cash flow has three sections that include operating, investing, and financing activities. Operating activities includes receipts and payments from normal business operations. Investing activities include the purchase or sale of long-term asset and investments. Financing activities relate to borrowing money and making payments to creditors and investors. Now Indirect cash flow does not include the amount of information that direct cash flow does. Companies prepare the indirect statement by starting with net income as it was reported in the income statement. Adjustments are made for non-cash items. The indirect preparation method takes an accrual-based income statement and converts it to a cash-basis income statement.
The Financial Accounting Standards Board prefers to use the direct statement of cash flow. They use this method instead of the indirect cash flow because the business stakeholders find that it is easier to read. Companies like to use the indirect approach because it is easier to prepare since the information is already accessible. I personally prefer the indirect approach just because it is simpler to prepare. A lot of companies decide to use the indirect method over the direct method because in the FAS 95 it requires companies to submit supplemental report similar to the indirect method if the company decides to use the direct method.
For preparing the direct method you have to find the cash flows from operating activities, investing activities and financing activities; which can be a long process. The direct method uses the balance sheet and net income and then decreases all non-cash assets.