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business and finance question

Business & Finance
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 what is the differences between the direct and indirect presentation of cash flows. Why does the Financial Accounting Standards Board allow both methods? Which do you prefer? Why?

Aug 14th, 2014

The direct method tends to be more comprehensive in terms of providing values for operational cash flow activities. It is, however, more difficult to construct, as some companies do not collect information at this level of detail. Additionally, the direct method attempts to reconcile the differences between the income statement and the cash flow statement created by cash vs. accrual accounting

The indirect method focuses on differences rather than the reconciliation between the income statement and cash flow from operations. To clarify, the direct method focuses on reconciliation, which tends to be more detailed and require more information -- it is more like a mathematical proof than an accounting of cash flows. The indirect method focuses on highlighting differences and therefore requires less detail. From a practical perspective, the direct method costs more to produce and maintain than the indirect method, which is why it is used less.

Because the direct method results in a more easily understood report, but most people end up using the indirect method because under FAS 95 if you use the direct method you need to provide supplemental information that's similar to the indirect method so it's twice as much work. 

i prefer indirect method because starts it with net income and converts it to net cash flow from operating activities. In other words, the Indirect method adjusts net income for items that affected reported net income but didn’t affected cash. To compute net cash flows from operating activities, noncash changes in the income statement are added back to net income, and net cash credits are deducted


Aug 14th, 2014

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