Bus591 Week 6 Discussions

Indirect Method vs. Direct Method

Financial statement preparers have two choices in preparing the statement of cash flows: the indirect method and the direct method. The indirect method is used extensively in practice even though the F.A.S.B. has expressed a preference for the direct method. Discuss the similarities and differences between the direct and indirect methods, and the advantages of using each method. 

Your answer should illustrate understanding of the cash flow statement. A minimum of 100 to 200 words is required for your answer. Respond to at least two of your classmates’ posts.

The indirect method adjusts net income for items that do not affect cash to determine net cash provided by operating activities and a majority of companies use this method because it is easier and less costly to prepare and it focuses on the differences between net income and net cash flow from operating activities; on the other hand, direct method which is preferred by the Financial Accounting Standards Board (FASB), shows operating cash receipts and payments and it is prepared by adjusting each item in the income statement from the accrual basis to the cash basis (Kimmel, Weygandt & Kieso, 2011). Both methods could be used however, the FASB prefers the use of the direct method over the indirect method because the direct method is straightforward and easier to understand and helps to determine differences between net cash flow and accrual based income from operating activities.

Kimmel, P.D., Weygandt, J.J., & Kieso, D.E. (2011). Financial accounting: Tools for business decision making (6th ed.).

Horizontal vs. Vertical Analysis

Discuss the horizontal and vertical analysis of a financial statement, and how each is used to help financial statement users make better decisions.  Also, explain the liquidity, solvency, and profitability ratios introduced throughout the text. Describe how the ratios are used in analyzing a firm’s liquidity, solvency, and...