Xacc 291 - Direct & Indirect Cash Flows

Direct and Indirect Cash Flows

Robert Slade

XACC/291

November-15-2015

Anthony Bria

Direct and Indirect Cash Flows

Companies and corporation must prepare financial statements every month that include direct and indirect cash flows. Cash flow statements are extremely important to company’s because they showcase the ways in which a company is spending and receiving it money. Even though direct and indirect cash flow statements come to the same conclusion or have the same ending results the way that they come to these conclusions are very different.

        The biggest difference between the two methods (direct and indirect) are associated with the cash flows from operating activities found in the statement of cash flows first section. The Accounting Coach website states that, “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. 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 by operating activities. (This is done automatically under the indirect method.)”

        The Financial Accounting Standards Board allows both method (direct and indirect) because they both show a company’s inflow and outflow of cash from the necessary activities. The Financial Accounting Standards Board prefers the direct method over the indirect method because of all of the detailed information in contains concerning receipts and payments. However, majority of the companies and corporations prefer the indirect method over the direct method because those statements are easier to prepare.

        After reading and researching to due this paper, if I had to choose which method that I would prefer, I would choose the direct method because it shows all the details and I would be able to visually see how all the money is spent and received. Now after I got more acquainted with this and understood it more then maybe I would go with the indirect method because of its simplicity but not before I learned it the way I should have.

Reference:

Accounting Coach Website, “Q&A’s,” “What is the difference between the direct method and the indirect method for the statement of cash flows?” retrieved from http://www.accountingcoach.com/blog/direct-and-indirect-method-cash-flows