Deriving cash flows from operating activities
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There are two ways to derive cash flows from operating activities: the direct method and the indirect method.
How would you explain the differences in these two approached?
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Solution Summary
Your response is in the attached file so that I could give you example cash flow statements. Your response is 663 words and includes examples of two cash flow statements in both formats and why they are different.
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Your response is in the attached file so that I could give you example cash flow statements.
Your response is 663 words and includes examples of two cash flow statements in both formats and why they are different.
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The two differences in reporting operating cash flows is a reporting choice. You can either report using the direct method or using the indirect method. Both methods report the same total cash flows from operating activities. That is, the operating cash flows are the result of the deposits and payments made during the period related to the core operations of the firm (selling to customers and providing services). This omits buying and selling of investments, long term assets, and transactions with owners and credits.
The direct method mirrors the checkbook. It shows collections from customers (deposits) and payments to vendors and employees.
The indirect method doesn't look ANYTHING like the checkbook activity (deposits and payments) but will report the same operating cash flow amount. The indirect method is not really just a reporting of operating cash flows. It is a ...
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