Direct and Indirect Cash Flows

Direct and Indirect Cash Flows

XACC/291

March 1, 2015

Cash flow is defines as the “total amount of monies transferred to and from a business which affects the liquid assets the liquid assets availability within the company” (Investopedia (2015)). The changes that occur are recorded and reflected on the balance sheet. Cash flow is generally used to determine a company’s “short-term capabilities to pay expenses and expenditures for daily operations” (Weygandt, Kimmel, & Kieso, 2010). The methods that are used are “{direct and indirect cash flow”(Weygandt, Kimmel, & Kieso, 2010). The financing and investing activities are not different between the two different methods; however, the operation of cash flow is varies when using either the direct and indirect method.

Operating activities include detailed lines of activity under the direct method. The direct cash flow shows a list of each “large item of operating cash receipts” (Weygandt, Kimmel, & Kieso, 2010). The large items of operating cash payments are also shown. The cash receipts subtract the cash payments and determine official net cash balance from the operating activities. Activities that affect the balance sheet are cash payments and cash paid to suppliers for merchandise (Weygandt, Kimmel, & Kieso, 2010).

Net income and any adjustments that occur are shown using the indirect method of cash flow. The adjustments must first be “reconciled” (Weygandt, Kimmel, & Kieso, 2010) to find the total net income of cash from operation activities. The statement of cash illustrates the need to {“take away or add (making adjustments) items to meet net cash of operating activities” (Weygandt, Kimmel, & Kieso, 2010). The indirect cash flow method only reports the most crucial adjustments to completely balance the net income against the official net cash amount by way of focus on operating activities.

The Financial Accounting Standards Board allows both the direct and indirect cash flow methods because there...