Answer to Question #301296 in Management for Obama

Question

Cash flow statement complements the income statement and the balance sheet

summarizing all cash inflows and outflow transactions in the company within the given

financial year. However, there are two different methods of preparing the cash flow

statement – direct and indirect.

Enlist the differences between Direct and Indirect method of cash flow statement.

Answer 1

DIFFERENCE BETWEEN DIRECT AND INDIRECT METHOD OF CASH FLOW STATEMENT

·        Direct cash flow method changes in the cash receipts and the cash payments are reported in cash flows from the operating activities section whereas in case of indirect cash flow method changes in assets and liabilities accounts is adjusted in the net income to arrive cash flows from the operating activities.

·        Direct method of cash flow starts with cash transactions such as cash received and cash paid while ignoring the non-cash transactions while Indirect cash flow method, on the other hand, the calculation starts from the net income, and then we go along adjusting the rest

·        The indirect method of cash flow uses net income as the base while direct method of cash flow in operating activities includes the cash being received from the customers and the cash paid to the suppliers, employees, and others