What are the differences between the direct and indirect method of presenting a statement of cash flows? Which method of presenting a statement of cash flows is the best? Why? Which method appears to be most preferred ?
The main difference in the statement of cash flows deals with operating activities.
Using the direct method, the cash from operating activities will include things like "cash from customers" and "cash paid to suppliers" (Think of this as building up to the cash flow). The direct method also requires a reconciliation of net income to the cash provided by operating activities (Done separately from the body of the statement, the indirect method has it integrated into it)
The indirect method shows net income followed by the adjustments needed to convert the total net income to the cash amount from operating activities. (Think of it subtracting from net income until you have your cash flow)
The direct method is more consistent with the objectives of SFAS and FASB encourages, but does not require it's use. The indirect method is used by the vast majority of companies.
I hope this helps you understand the main differences.
Dec 10th, 2014
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