Business Finance
What is the purpose of the Statement of Cash Flows?

Question Description

 What is the purpose of the Statement of Cash Flows?  Describe the direct method of reporting cash flows from operating activities.  Describe the indirect method of reporting cash flows from operating activities.  Your post must be 250 words.

Final Answer

Basically, the statement of cash flow is apprehensive with the cash flow in and out of the business. It grasped both the existing operating results and the associated balance sheet changes (Helfert, Erich A. 2001). The principal objective cash flows statement is to present information about cash payments, cash receipts and the overall change in cash resulting from:

  • Operating activities

  • Investing activities

  • Financing activities

     The key distinction among the indirect method and direct method is the first portion of cash flowstatement named as cash flows from operating activities. But other two portions are same in the cash flows reported under head of investing and financing activities. There is no disparity among them whether used direct or indirect method.
      In direct method for making statement of cash flow reports key classes of gross cash payment and receipts.
In this method, the cash flows from operating activities will include the amounts for lines such as cash from customers and cash paid to suppliers. On other hand, the indirect method will present net income pursued by the required adjustments to switch the total net income to the amount of cash generated by operating activities. Such adjustments are needed because net income is computed according to the accrual method, and our interest is only in cash receipts summarized by disbursements of cash (Helfert, Erich A. 2001).
      The direct method must also present net income reconciliation to the cash generated by operating activities. While under the indirect method this is automatically done.

Reference

Helfert, Erich A. (2001). "The Nature of Financial Statements: The Cash Flow Statement". Financial Analysis - Tools and Techniques - A Guide for Managers. McGraw-Hill. p. 42


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