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A cash flow statement is one of the most important resources for a business to have.
Cash flow statement direct method and indirect method. A direct method is easier to interpret as it simply lists all the major operating cash receipts and payments during the period. Indirect Method Statement Format. The conversion of net income into net cash flow from operating activities may be done through either a direct method or an indirect method as explained in the following discussion.
The indirect method on the other hand computes the operating cash flows by adjusting the current years net income for changes in balance sheet accounts. Also called the income statement method reports cash receipts. Components of Indirect Cash Flow Statement.
Any deferrals or accruals of past or future operating cash receipts or payments. As discussed in ASC 230-10-45-28 cash flows related to operating activities may be presented in one of two ways the direct method or the indirect method. The alternative reporting method is the direct method.
It permits an evaluation of cash flow relating to specific line items of income statement such as sales and cost of goods sold. Money coming into the business usually from customers are listed under cash inflows. The Direct Method or the Indirect Method only apply to the Cash Flow from Operations and do not effect the Cash Flow from Investing or Cash Flow from Financing sections of the Cash Flow Statement.
In other words changes in asset and liability accounts that affect cash balances throughout the year are added to or subtracted from net income at the end of the period to arrive at the operating cash flow. In this section any interest paid on outstanding debt is also reported along with all income taxes paid. With the indirect cash flow you are reconciling back to cash.
For example Lowry Locomotion constructs the following statement of cash flows using the indirect method. The main difference between the direct method and the indirect method involves the cash flows from operating activities. In the direct method of cash flow statement preparation actual receipts from customers and actual payments to suppliers service providers employees taxes etc.
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