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Direct and Indirect Presentations of Cash Flows

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1) What are the differences between the direct and indirect presentation of cash flows? Why does the Financial Accounting Standards Board (FASB) allow both methods? Which do you prefer? Why?

2) What are some common ratios that are used to analyze financial information? Which are the most important? What are some examples of how ratios would be used in the decision-making process?

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This solution discusses the differences between direct and indirect cash flows in 861 words with 3 references.

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1) What are the differences between the direct and indirect presentation of cash flows? Why does the Financial Accounting Standards Board (FASB) allow both methods? Which do you prefer? Why?

There are two methods that are used in calculating and reporting the amount of net cash flow from operating activities: the indirect method and the direct method. Both methods produce identical results. The indirect method is used more often because it reconciles the difference between net income and the net cash flow provided by operations. The indirect, or reconciliation, method focuses on the difference between net income and net cash flow from operations. Advocates of the indirect method note that it provides a useful link among the statement of cash flows, the income statement, and the balance sheet. Critics point out that the direct method requires a supplemental disclosure to present a reconciliation of net income and net cash. The incremental cost of providing the additional information disclosed in the direct method is, however, not significant.
The direct method is less popular but is favored by many financial managers because it reports the source of cash inflows and outflows directly, without the potentially confusing adjustments to net income. Instead of starting with a reported net income, the direct method analyzes the various types of operating activities and ...

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