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
key distinction among the indirect method and direct method is the first portion
of cash flowstatement
named as cash
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.
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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