...Direct and Indirect Cash Flows Melita Bryant XACC/291 08/26/2014 Richard Fielden Direct and Indirect Cash Flows The statement of cash flows is important to a business, it highlights the way in which a company is receiving and spending its money. This process is also complicated by the way in which the business chooses to come to the end results. While the direct and indirect methods of preparing the statement of cash flows come to the same end result, their method is a little different. The operations section of the statement of cash flow is the only one that allows the use of either of these methods. The main difference between the direct method and the indirect method involves the cash flows from operating activities, the first section of the statement of cash flows. (There is no difference in the cash flows reported in the investing and financing activities sections.) Under the direct method, the cash flows from operating activities will include the amounts for lines such as cash from customers and cash paid to suppliers. According to "Cash Flow Statement Direct Method" (2014), “The direct method of presenting the statement of cash flows present the specific cash flows associated with items that affect cash flow”. In contrast, the indirect method will show net income followed by the adjustments needed to convert the total net income to the cash amount from operating activities. The direct method must also provide a reconciliation of net income to the cash provided...
Words: 603 - Pages: 3
...proposals were issued in Australia and New Zealand which aim to harmonize the standards as adopted in both countries (KPMG, 2010). The purpose of this paper is to study whether the given option of using the indirect method in reporting cash flow statement is beneficial to the users of general purpose financial reports. The paper is divided into five parts where it started off with a brief introduction of AASB 107, following by the reasons for harmonization, the arguments for and against the (in)direct method as well as some criticisms before moving into conclusion. Cash flow is vital to determine the potential of profitable firms as most firms under the basis of accrual accounting may still present favorable profits, despite having poor cash management. The objective of AASB 107 is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of cash flow statement (Australian Accounting Standards Board [AASB], 2013). In this paper, focus is concentrated in reporting cash flow from operating activities using either the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed or indirect method, whereby profit or loss is adjusted for the effects of transactions of a non-cash nature (AASB, 2013). As mentioned above, one of the major reasons that such harmonization occurred is because standardization of accounting standards is not necessarily the standardization of accounting...
Words: 1489 - Pages: 6
...Direct and Indirect Cash Flows Rochelle Hicks XACC/291 Rashad Abdullah The cash flow statement provides information for managers and investors of how well a business is managing its cash that is coming in and going out. Businesses need liquid assets to pay bill and buy inventory. If assets are not readily available, bills cannot get paid and new inventory cannot be purchased (Petryni, 2016). The direct method and indirect method of cash flows are different due to the cash flows from operating activities, the first portion of the statement of cash flows. There is no difference in the cash flows in the investing and financing activities portion of the statement of cash flows. The cash flows from operating activities include cash from customers and cash paid to suppliers using the direct method. Net income, followed by adjustments needed to convert the total net income to the cash amount from operating activities is reported using the indirect method. A reconciliation of net income to the cash provided by operating activities is reported under the direct method but under the indirect method it is done automatically. For the most part corporations, us the indirect method of cash flows (Averkamp, 2016). The Financial Accounting Standards Board recommends the direct method of cash flows but allows corporations to use the direct and indirect method of cash flows because they both report net cash flow from operating activities. A statement of cash flows is a requirement as part...
Words: 369 - Pages: 2
...Statement of Cash Flows? Cash received from Customers, Interest & Dividends, Trading Securities Cash paid to Vendors, Suppliers, Interest, Taxes, Trading Securities What items are included in investing activities on a Statement of Cash Flows? Cash received: Sale of PP&E, Sale of Investments, Loan Principle Cash paid: Loans, Acquisitions, AFS or HTM Securities, Taxes, Trading Securities What items are included in Financing Activities in a Statement of Cash Flows? Cash received: Issuance of Stock, Issuance of Debt Cash paid: Dividends What is the direct method for a Statement of Cash Flows? Starts with Income from Continuing Operations Adjusts for changes in accounts like A/R, A/P, Inventory and non-cash revenues, expenses, gains, losses If used, the Indirect Method must also be shown What is the Indirect Method for a Statement of Cash Flows? Starts with Net Income Adjusts for changes in accounts like A/R, A/P, Inventory and non-cash revenues, expenses, gains, losses What is the primary purpose of statement of cash flows? To provide relevant information about the enterprise's cash receipts and cash payments during a period Is the purchase of cash equivalent using cash reported on the statement of cash flows? No - purchase of cash equivalent using cash is NOT an outflow of cash and therefore does not get reported on Statement of cash flows. Where would the collection of dividends be classified on the Statement of Cash Flows...
Words: 3108 - Pages: 13
... The primary purpose of the statement of cash flows is to provide cash-basis information about the company’s operating, investing, and financing activities. 2. The statement of cash flows provides information to help investors and creditors assess the cash and noncash investing and financing transactions during the period. 3. Companies classify some cash flows relating to investing or financing activities as operating activities. 4. The first step in the preparation of the statement of cash flows is to determine the net cash flow from operating activities. 5. The net increase (decrease) in cash reported on the statement of cash flows should reconcile the beginning and ending cash balances reported in the comparative balance sheets. 6. Under the accrual basis of accounting, net income is usually the same as net cash flow from operating activities. 7. A company can convert net income to net cash flow from operating activities through either the direct method or the indirect method. 8. The direct method, also called the reconciliation method, reports cash receipts and cash disbursements from operating activities. 9. The indirect method adjusts net income for items that affected reported net income but did not affect cash. 10. The FASB encourages the use of the indirect method over the direct method. 11. When accounts receivable decrease during a period, cash-basis revenues are higher than revenues reported...
Words: 2389 - Pages: 10
...First of all, this assignment is mainly talk about the indirect method for the cash flow statement. The key issues to be discussed in this assignment is about whether the option of using the indirect method of cash flow reporting is beneficial to the users of general purpose financial reports in Australia. Furthermore, the reasons for harmonization, accounting standard AASB 107 Statement of Cash Flows and the Conceptual Framework will also be discussed. In AASB 107, cash flow is defines as inflows of the cash and cash equivalents and ‘cash’ as cash on hand and demand deposits. (AASB 107, 2011) The statement of cash flow can be done using indirect method and direct method. Both methods have the three same categories which is cash flow from operating activities, investing activities and financing activities. However, the different between these methods are the ways that we calculate the net cash flow from the section operating activities. AASB 107 state that an entity using direct method shall report cash flows from operating activities are the major classes of gross cash receipts and gross cash payments are disclosed. For indirect method, profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows. It also means reconciling from net income to cash provided by operating activities. (James collines,eHow...
Words: 1282 - Pages: 6
...Direct and Indirect Cash Flows A company reports revenues and expenses on an income statement which reveals little about cash flowing into and out of the business. Because of the lack of cash flow information, companies turn to a cash flow statement that has a section to restate income on a cash basis. There are two choices to report operational cash, direct and indirect methods. When the direct method is used, cash flows are listed in the operations of the cash flow statement. These cash flows come from customer collections, cash paid to suppliers, employees, and also reports of cash paid for income tax and interest. A problem using the direct method is the company might not keep the information in the required form making it necessary to make special provisions to track sales separately. Using the indirect method you can adjust the net income to change it from an accrual to a cash basis. This means adding back non-cash expenses such as depreciation, amortization, loss provision for accounts receivable and any losses on the sale of fixed assets. The indirect method uses readily available information and most companies find it easier to use. Essentially, the indirect preparation method takes an accrual-based income statement and converts it to a cash- based income statement. Both flow statement preparation methods are allowable under basic accounting standards, but the Financial Accounting Standards Board prefers the direct method cash flow statement for public companies...
Words: 408 - Pages: 2
...Direct and Indirect Cash Flows Companies will typically prepare a cash flow statement every month to determine when it can be expected that an inflow of cash will begin. Officially, these are known as the statement of cash flows. An accounting department can choose from two different methods to prepare the cash flow statements, these are the direct and indirect methods. Each of these methods will approach the reporting of cash flow from different angles, but each method will result if the same ending number for the accounting period. The direct method of cash flow statement will identify the sources of cash and the uses divided into three sections which contain the cash receipts and cash payments. These include operating, investing and financial activities. The indirect cash flow statement method does not contain as much information as the direct method. A company will prepare an indirect statement, starting with a net income that is reported in the monthly income statement. The accountants will then make adjustments for all non-cash items, essentially taking the accrual based statement and converting it to cash based. A company can include a disclosure using either the direct or indirect cash flow statement. The FASB often requires that a company discloses any non-cash financing and investing activities along with the cash flow statement. Both cash flow statement preparation methods are acceptable, but the Financial Accounting Standards Board prefers that companies use...
Words: 372 - Pages: 2
...Direct and Indirect Cash Flows XAC/291 When a company has to revenue and expenses on its income statements, they often have the choice of using a direct or indirect presentation of cash flow. Direct presentation of cash flow begins with cash from sales and is deducted from the operating expenses to conclude to a net cash flow from expenses. Cash from operations come from customers, cash paid to suppliers, employees and other expenses. One of the reoccurring problems with the direct presentation of cash flows is the inability to find or track information in regards to the cash flows. Companies would have to make alterations in order to find where cash and credit would have come from in hopes to narrow down their search for specific information. The indirect presentation of cash flow begins with the net income from the income statement, unlike the direct presentation of cash flow, and separated into three sections known as Expenses, ash, and Revenues. Ultimately, what is being done is that the net income would be adjusted from accrual to cash. Accounts that fall into the use of the indirect method are inventory, supplies, accounts receivable, unearned revenues, liabilities, and prepaid assets. Depreciation, amortization, and losses are some of the methods that would be typically used while performing an indirect presentation of cash flows. The indirect method uses all available information to come to a conclusion and is often said to be the...
Words: 415 - Pages: 2
...Direct and Indirect Cash Flows XACC/291 August 20, 2014 Direct and Indirect Cash Flows The direct cash flow method is the method that includes a large amount of detail and organization in comparison to the indirect cash flow method. Direct cash flow statements start out with the three sections that contain cash flow which are operational activities, investments, and financing activities. The operating activities section will include receipts and payments that are related to the day to day operations of the company and normal business transactions for the company. The investing section will include details about the purchase or sale of long-term assets and investments like property. Lastly, the financing activities will have receipts for borrowing money as well as money that has been paid to investors and creditors. Unlike the direct method, the indirect method is a more accrual based method that does not contain as much information. Instead of preparing statements using receipts and paperwork to start a company will use the income statement to get a starting figure for the net income of the company. Then from the net income the accountants will make adjustments for all noncash items so that the statement goes from an accrual based income statement to a statement that only includes cash related items. This method does not require receipts and paperwork to get to a cash flow total because the accountants remove anything that is noncash and everything by default should be...
Words: 415 - Pages: 2
...Direct and Indirect Cash Flows Jenn Cobb XACC/290 Cheryl VanNorman August 27, 2014 The statement of cash flows is an important financial statement that reports the cash changes, input and output, during a financial period. The information contained in the statement of cash flows helps both internal and external users to assess the company's ability to generate further cash flows, meet obligations, and explain the difference between net income and net cash provided by operating activities. There are two different ways to present this information on the statement of cash flows either by using the direct method or the indirect method. There are both differences and similarities between the two methods. The direct method is encouraged but not required by the FASB. The direct method is easier to understand. It includes the amounts for cash from customers as well as cash paid to suppliers. This is a much more detailed explanation of cash flows than the indirect method. This method takes more time and is more costly than the indirect method. Some of the information may not be readily available. The information that is included in the direct method is more useful and preferred my internal and external users. The indirect method is not as detailed as the direct method. The indirect method reports the net income. It then makes adjustments for items that do not affect cash flow. It makes the adjustments necessary to convert total net income into the cash from...
Words: 406 - Pages: 2
...Direct & Indirect Cash Flows The cash flow statement is an important financial document that gives an in depth view of a company’s finances. It specifically focuses on the company’s cash flow into and out of the business. There are two methods for preparing and presenting the cash flow statement, the direct method and the indirect method. The two methods of reporting affect only the presentation of the operating section. The remaining two sections (the investing and financing sections) remain the same regardless of which method is used. With the direct method the operating activities section will include the amounts of cash from customers and cash paid out to suppliers. When preparing a cash statement, money spent is subtracted from money received to calculate net cash flow. Depreciation is not included because it is not money spent or received, it is an expense that affects net profits. The indirect method focuses on net income and net cash from operations. One would adjust net income to convert it from an accrual to a cash basis. One would then have to make some adjustment and add back non-cash expenses such as depreciation, amortization, loss provision for accounts receivable and any losses on the sale of a fixed asset. One can also adjust net income for changes between the starting and ending account balances in current assets excluding cash and current liabilities for the period The Financial Accounting Standard Boards recognizes and allows both methods of cash flow...
Words: 508 - Pages: 3
...Direct and Indirect Cash Flows The statement of cash flows is one of the components of a company’s set of financial statements that show the changes in the balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities (Accountingtools, 2016). Companies must adjust the effect of the use of accrual accounting to determine cash flows. In order to prepare this statement, the information needed usually comes from three sources: comparative balance sheets, current income statement, and any additional information such as transaction data that are needed to determine how cash was provided or used during the period. In order to determine net cash provided/used by operating activities a company must convert net income from an accrual basis to a cash basis. This conversion can be done by two different methods: the indirect method or the direct method. The indirect method works by adjusting the net income for items that do not affect cash such as depreciation, amortization, loss provision for accounts receivable and any losses on the sale of a fixed asset. According to Bassam (2014) these are some of the advantages of the indirect method: “provide more meaningful information, tells reader if sales are increasing or decreasing, easier for the preparers to create, simple for users to analyze…” The second method is the direct method. The direct method shows operating cash receipts and payments...
Words: 414 - Pages: 2
...NJ Explanation of Statement of Cash Flows GAC 515 Professor Frank Longo Sandra Rambert August 7, 2014 Statement of Cash Flows has two main purposes firstly, deliver data about a business’ cash receipts and payments. Secondly, statement of cash flows records changes as a product of operations, investments and financial activities during a period on a cash basis. (Weil, 2014) Information in a statement of cash flows can be useful to investors, creditors and any other interested parties. Individuals or entities reviewing the cash flow statement can determine the optimal time to implement future business strategies, payout dividends and invest money back into the company. Cash flow statement identifies the net income and net cash flows from operating activity. Statement of cash flows is usually prepared using two methods the indirect method and the direct method. “The indirect method also known as reconciliation method starts with net income and converts it to net cash flow from operating activities.” (Explanation, 2011) The indirect method records net income for transactions that relates to net income but not cash. To calculate net cash flow from operating activity charges that are non-cash in the income statement are added back to net income and non –cash credits are deducted from net income. (Weil, 2014) The greatest advantage of the indirect method is it concentrates on the difference between net income and net cash flow from operating activities which...
Words: 1284 - Pages: 6
...The most important difference between the direct method and the indirect method involves the cash flows from operating activities. The differences can found in the first section of the statement of cash flows. There is no difference in the cash flows reported in the investing and financing activities sections. When using the Direct Method, one should list cash flows in the operations section of the cash flow statement. Under this method, the cash flows from operating activities will include the amounts for lines such as cash from customers and cash paid to suppliers, employees and others. The same section also reports cash paid for income tax and interest. The problem in trying to use the direct method is that a company might not keep the information in the required form. For instance, companies using accrual accounting may group together cash and credit sales, in which case, they would have to make special stipulations to track cash sales separately. The direct method must also provide a reconciliation of net income to the cash provided by operating activities. When using the Indirect Method, one should adjust net income to transform it from an accrual to a cash basis. However, this will require one to add back non-cash expenses. Categories included in non-cash expenses may include depreciation, amortization, loss provision for accounts receivable and any losses on the sale of a fixed asset. In addition, one will need to adjust net income for changes between the...
Words: 451 - Pages: 2
