Assess the Components of Cash Flow Statements - Research Paper Example

The implementation of any non cash undergoes changes. 2. There are two methods of preparing a cash flow statement namely;- direct method and indirect method. Direct method uses real cash flow data from the organization’s operations. It presents major classes of gross cash receipts and payments. It is typically used by small firms. While preparing a cash flow using the direct technique, items such as amortization of insubstantial assets, preliminary expenditures, depreciation, and debenture discount are disregarded from the cash flow statement given that the direct method is inclusive of non-cash and cash transactions.

Indirect method derives the data from the income statement and from changes on the balance sheet from one period to the next. The income statement and the balance sheet are based on the accrual accounting. It is a partial communication of accumulation basis gains to cash basis gains. 3. Different components of the cash flow statement employ indirect method. For instance we arrive at net cash flow from operating activities indirectly by starting with reported net income and working backwards to convert that amount to a cash basis.

Depreciation expense does not reduce cash, but it is subtracted in the income statement. In the indirect method, positive adjustments to net income are made for decreases in related assets and increases in related liabilities, while negative adjustments are made for increases in those assets and decreases in those liabilities (Brahmasrene et al, 2004). The next section of the Statement of Cash Flows is Cash Flows from Investing Activities. Usually, this part comprises of any long-term savings the business makes plus any investment in fixed assets, such as plant and equipment.

The last section of the cash flow statement is Cash Flows from Financing Activities (Dechow, 1994). Here, you have to finance your firm with long-term bank loans that have an increase and this is prepared using long terms. If you unite the