Direct and Indirect Cash Flows
Direct and Indirect Cash Flows
XACC/291
Shontell Chrisman
October 30, 2013
Direct and Indirect Cash Flows
The direct and indirect presentations of cash flows both reach the same conclusions, however, the way that the conclusions are reached are different. The direct method reports everything that involves cash, and the indirect method reports for items that do not affect cash.
A direct statement of cash flow reports a company 's sources and use of cash. The statement has three sections that report cash receipts and cash payments; operating, investing and financing activities. Operating activities include receipts and payments from normal business operations while investing activities include the purchase or sale of long-term asset and investments. Financing activities relate to making payments to creditors and investors. The indirect method reports operating cash flows based on changes in the balance sheet from period to period as they relate to net income. An indirect statement only lists the change in cash received from the previous period, it does not report the total cash received from customers.
The Financial Accounting Standards Board allows both statements of cash flow preparation methods because the purpose is to show the cash inflows and outflows from each activity. According to Weygandt, Kimmel, and Kieso (2010), the direct method shows operating cash receipts and payments, making it more consistent with the objective of a statement of cash flows. The FASB has expressed a preference for the direct method, but allows the use of either method. (Financial accounting (7th ed.)) I prefer the indirect method because it is easier to understand. However, can understand how a company or investor could benefit from the direct method as it shows the details of cash coming in and going out. This would allow them to see exactly how a company both acquired its cash, and how it used its cash. How a company acquires and uses its cash
XACC/291
Shontell Chrisman
October 30, 2013
Direct and Indirect Cash Flows
The direct and indirect presentations of cash flows both reach the same conclusions, however, the way that the conclusions are reached are different. The direct method reports everything that involves cash, and the indirect method reports for items that do not affect cash.
A direct statement of cash flow reports a company 's sources and use of cash. The statement has three sections that report cash receipts and cash payments; operating, investing and financing activities. Operating activities include receipts and payments from normal business operations while investing activities include the purchase or sale of long-term asset and investments. Financing activities relate to making payments to creditors and investors. The indirect method reports operating cash flows based on changes in the balance sheet from period to period as they relate to net income. An indirect statement only lists the change in cash received from the previous period, it does not report the total cash received from customers.
The Financial Accounting Standards Board allows both statements of cash flow preparation methods because the purpose is to show the cash inflows and outflows from each activity. According to Weygandt, Kimmel, and Kieso (2010), the direct method shows operating cash receipts and payments, making it more consistent with the objective of a statement of cash flows. The FASB has expressed a preference for the direct method, but allows the use of either method. (Financial accounting (7th ed.)) I prefer the indirect method because it is easier to understand. However, can understand how a company or investor could benefit from the direct method as it shows the details of cash coming in and going out. This would allow them to see exactly how a company both acquired its cash, and how it used its cash. How a company acquires and uses its cash
References: Weygandt, J.J., Kimmel, P.D., & Kieso, D.E. (2010). Financial accounting (7th ed.). Retrieved from The University of Phoenix eBook Collective database