Financial Accounting Week 12 Course Project - Assignment Example

Only the operating sections deals with direct and indirect cash flows. To compare the income statement and the operations section, one needs to point out the difference in timing existing between the cash and income collections (Pratt, 2000). The comparison also highlights the timing difference between the cash payment and expenses. Large gap might show that the company is aggressive to recognize income, or the organization is spending a lot of money to maintain or buy assets, a fact that is not common in income statement.

In direct method, the cash flows are listed in the operation part of cash flow statement. Cash flows arise due to transaction from client collection and cash payments made to employees, suppliers, and other. The section also records the cash payments for interest and income tax. The problem of using the direct method is that the organization fails to keep the information in the appropriate manner. For instance, organizations that use the accrual accounting lump the credit and cash sales together (Kimmel, Weygandt & Kieso, 2011).

They make special provision in tracking their cash sales separately. Direct method is not commonly used in companies compared to indirect method. The direct method adds the cash flows inside and outside the business in every operations areas; financing, operations, and investment. The method is easy to understand but it does not help much, it only tells the customer what he already knows. The direct method is normally used in commonwealth countries. Conversely, in indirect methods, one needs to adjust the net income to change it to cash basis from accrual basis.

The method is common and begins with the net profit and then changes accordingly the non-cash items balance, balance sheet items, and accounts receivables. The method is helpful to the customer when used together with the balance sheet and the income statement. They also need one to add again the non-cash expenses like amortization, depreciation, loss