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Statement of cash flows - Direct and indirect methods

Is there a difference between direct and indirect methods to make a statement of cash flows? Discuss and note two or three specific differences. In addition, clearly
- Distinguish between cash flows from operating activities and cash flows from investing activities.
- Compare the statement of cash flows with income statement using terms of net income and cash at end of the year.
- Which of the two financial statements is the better one? Explain your reasoning.

Show formula for computations, compare two financial statements, discuss the results, and include references.

Solution Preview

Is there a difference between direct and indirect methods to make a statement of cash flows? Discuss and note two or three specific differences.

Under Direct method of cash flow statement, cash flow from operations is calculated directly i.e. all cash transactions are taken to find out the cash flow. On the other hand, under indirect method of cash flow statement, net income is adjusted for non-cash entries. Depreciation expense is added back and capital gain or loss is adjusted to the net income. Further, expenses which are not actually paid will be excluded by making adjustments to the net income and cash receipts are added ...

Solution Summary

The solution discusses the statement of cash flows using the direct and indirect methods.

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