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Statement of Cash Flow - Essay Example

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The writer of the essay "The Statement of Cash Flow" aims to analyze two methods for preparing and presenting the statement of cash flow; the direct method and the indirect method, the main difference lies in the presentation of the operating section…
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Statement of Cash Flow
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ment of Cash Flow of ment of Cash Flow A ment of cash flow is a financial report that outlines and details the sources of an organization’s cash and the manner in which it is spent in a given period and it does not contain any non-cash items such as depreciation (Epstein & Jermakowicz, 2007). It is a financial statement useful in the determination of the short- and medium-term feasibility of an organization. It is of the essence to study the cash flow statement of an organization because cash management influences the performance, especially for small and medium-size businesses (Taulli, 2004). For such businesses, cash flow statement may be studied at least quarterly. The statement of cash flow has been in use since November 1987 when the Financial Accounting Standards Board (FASB) issued a statement of financial accounting standards requiring businesses to use a statement of cash flow instead of a statement of changes in financial position.
There are two methods for preparing and presenting statement of cash flow; the direct method and the indirect method, the main difference lying in the presentation of the operating section. The sections of investing and financing are the same in both methods. In the direct method, cash flows from operating activities encompass amounts such as cash from customers and cash paid to suppliers. On the contrary, the indirect method shows the net income, followed by the adjustments required to convert the total net income to the total cash from operating activities (Brahmasrene, Strupeck & Whitten, 2004). In addition, the direct method must provide reconciliation of net income and the cash provided by operating activities, a process which is achieved automatically in the indirect method of cash flow statement. The indirect method is found to be more effective in relaying cash flow information. Thus, it is preferred to the direct method in most corporations (Brahmasrene, Strupeck & Whitten, 2004).
Whereas the direct method or the income statement method reports the main categories of operating cash receipts and payments, the indirect method places emphasis on net income and the net cash flow from operations (Taulli, 2004). This method begins with net income then adds depreciation, and calculates changes in balance sheet items. To obtain the net cash flow, the direct method starts with money received then subtracts money spent. In this case, depreciation is excluded since, although it is an expense, it is not money spent or received (Taulli, 2004).
References
Brahmasrene, T., Strupeck, C. D., and Whitten, D. (2004). Examining Preferences in Cash Flow Statement Format. The CPA Journal, 1(3); 54.
Epstein, B. J., and Jermakowicz, E. K. (2007). Interpretation and application of international financial reporting standards. John Wiley & Sons. 
Taulli, T. (2004). The Edgar online guide to decoding financial statements. J. Ross Publishing. Read More
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