Question

Describe the different methods of preparing the cash flow statement? How are they similar? How are they different?

Answer 1

Answer : There are two Methods of Preparing the Cash Flow Statement :

(1.) Direct method : Direct Method is the method in which Cash collections or cash received and Cash disbursement or Cash paid from Operating Activities .Cash paid to supplier is payment of cash and cash received is the inflow of cash .Therefore in this way items are adjusted for cash flow.

(2.) Indirect Method : Through this method we adjust Non Cash Item or Gain or loss on Non Operating Item to arrive at the cash flow from Operating activity.Non cash item include item of Depreciation , Amortization and so on.

They are similar in the way of calculation of Investing and financing Activity.Investing Activity are those activities which arises due to our investment activities and financing Activity arises due to various financing Activity such as raising of common stock , Debt issue , dividend paid , interest paid and so on.

They are differnt in the way of calculation of Operating Activities .In Direct Method Cash flow from operating activity are adjusted whereas in Indirect Method , INet Income is adjusted for various Non cash and Non operating Income.