Question

What section of the cash flow statement do you feel is the most important? Why?

What are the differences between the indirect method and direct method? Which method is used the most?

What can a financial user get from the statement of cash flows?

Answer 1

Cash flow sattement consists of mainly 3 parts.

1. Cash from operating activities

2. cahs from investing activities

3. cash from Finacing activities.

All the 3 parts of the cash flow statement are important. The importance of the cash flow depends upon the nature of user and the information required by the user. If a person who is involved in day to day activies, then by cash from operating activities he can decide the needed cash in upcoming period to operate his business. Similarly For CFO of the company, cash from financing activities is important where he can decide the upcoming payment of debt he is required to pay and from where he can raise funds. ALso he can decide that if extra funds are available then , where he can invest . So, importance of cash flow statement is decided by the nature of user and the use .

The direct method, the income statement is reformulated on a cash basis, rather than an accrual basis from the top of the statement (the income part) to the bottom (the expense part) whereas The indirect method works from net income, so the bottom of the income statement, and adjusts it to the cash basis. The indirect method starts with your net income and adds or subtracts the items based on changes in their balances So the direct method, starts with the income statement and rebuilds it on the cash basis.

A financial user may get many informations from cash flow statement. They are:

a. Liquid cash requirement of business

b. Operating cash requirement.

c. Fund to be paid in coming period.

d. Requirement of fund to be raised if any.

e. Extra funds to be invested if any.

f. Availability of fund for shareholders to pay dividend.

g. Cash blocked by debtors and payable to creditors.